FTX spread will worsen in crypto, but perhaps less damaging for the wider world

Crypto assets are known for being highly speculative and volatile, but it is their “debt problem” that has once again made headlines. As of November 2021, Total value The cryptocurrency has now dropped from a peak above US$3 trillion (£2.6 trillion) to around US$830 billion (£706 billion).

This coincides with a major recession in Global market due to rising interest rates, but falling prices also reflect a series of collapses and bankruptcies within the industry. These include Terra Luna blockchain, degree lenderthe Travel exchange/broker, hedge fund 3ACand now FTX/Alameda, just filed for bankruptcy.

Total value of crypto assets

The collapse of FTX, the world’s second largest cryptocurrency exchange, was linked to a liquidity crisis. This is where a company doesn’t have enough cash or its assets can’t convert to cash fast enough to meet demand.

In the case of FTX, there were concerns about its close relationship with hedge fund sister company Alameda. These things boiled over when rival exchange Binance announced a few days ago that it worry enough arrive remove 500 million US dollars holding in FTT cryptocurrency FTX.

Panicked investors began selling FTT and related cryptocurrencies quickly, causing them to plummet in value. Alameda tried to buy enough FTT to hold the price, but ran out of firepower. FTT has dropped to devastating levels, causing serious financial damage to Alameda and FTX.

At the same time, FTX customers are scared withdraw 6 billion US dollars from the exchange in just three days. FTX subsequently halted withdrawals, apparently lending Alameda the rest of customers’ funds, leaving customers stranded with billions of dollars worth of holdings on the exchange — presumably forever.

With many big FTX investors As BlackRock, Ontario Teachers Retirement Fund and Sequoia Capital are also about to run out of money, chief executive Sam Bankman-Fried (SBF) is Report is trying raised US$9.4 billion. Ominously, Binance initially expressed interest in buying FTX but plug out after reviewing the competitor’s financial position.

FTX spread will worsen in crypto, but perhaps less damaging for the wider world

Note that the chart shows monthly figures – peaks are actually higher than daily. Credit: Transaction View

Domino effect

Will anyone else rescue FTX? This can happen by investment organization buy lots of FTT to push its price back up or inject US dollars into the exchange to reassure customers and allow them to withdraw.

In research that I conducted with colleagues, we have shown that investing in recent “losers” like FTT can be a profitable short-term strategy. They tend to be more profitable in Week after a sharper drop than previous strong performers.

Overall, however, a rescue seems unlikely. It would be risky to try to rescue an exchange that has potentially no underlying value. Market sentiment also remains negative due to the economic backdrop: US Inflation may have peaked now, suggesting interest rates will stop rising, but it’s still early days.

Without a rescue, there are essentially three problems: what it means for the crypto industry, what it means for crypto assets like bitcoin, and what it means for the market. global financial markets and the broader economy.

The contagion in the crypto industry could go awry. Various Cryptocurrency Investment Firms like Genesis and Multicoin Capital confirmed that they have a large amount of money stuck on FTX.

The other problem is Alameda, is will cease to exist. It appears to owe many billions of dollars in transaction loans from lenders outside of FTX, which may not be repaid. This can cause solvency problems elsewhere. Cryptocurrency Bank BlockFirescued by FTX after the Luna incident earlier in the year, halted customer withdrawals.

As for the crypto price, bitcoin fell from around $21,000 to as low as $15,500 before recovering above $17,000 currently. With many smaller cryptocurrencies seeing even steeper price drops, expect even more sales as FTX-hit players shift their investments to dollars to stay afloat.

FTX spread will worsen in crypto, but perhaps less damaging for the wider world

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Bitcoin price chart

Worse still, Alameda is one of the biggest market makers of cryptocurrencies, a key role in financial market which involves performing the other side of the transaction to enable the buyer and seller to transact. At a time when selling is more likely, reduced trading liquidity could drag prices even lower, potentially creating a larger stampede.

However, an FTX/Alameda bankruptcy may not cause bitcoin to completely crash in price. Because it is more decentralized than other crypto assets, meaning it is not controlled by any single entity, investors can to some extent swap it for their other cryptocurrencies instead of buying US dollars. Overall, JP Morgan calculates that bitcoin could drop to $13,000 in the coming weeks, suggesting we are not too far from a bottom.

It’s also worth noting previous findings from my team that the number of Tether stablecoins in circulation is a good indicator of future crypto prices. This number bottomed out in the summer and has not decreased significantly recently.

Greater risk

The FTX spread could also threaten the overall financial stabilitysimilar to Lehman’s fall in 2008? In general, cryptocurrencies are not yet considered a serious threat to global financial stability as they are still poorly linked to real economic activities outside of the world. financial sector.

However, if large institutional investors exit crypto entirely and sell bitcoin and other tokens, the cryptocurrency price could plummet even further and lead to increasing spillovers. Other crypto investors will take a different shot and, as a result, spend less in the broader economy or sell non-crypto holdings like stocks to cover their losses. surname.

Based Our analysis of liquidityThe Canadian, US, and EU stock markets are more closely linked to cryptocurrencies than the Chinese and Japanese stock markets. As a result, the reactions of these markets to crypto issues will be more apparent.

However, in general, FTX is probably still a electronic money more problematic than a broader problem: it’s the story of FTX’s disastrous financial management and its competition with Binance threaten stability of the cryptocurrency market. We will be watching closely to see how the contagion plays out in the coming weeks.

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