“This Is Very, Very Bad for the Crypto Industry.” Who Will Be Dragged to the Bottom by the Collapse of FTX
On Friday, FTX filed for bankruptcy. However, the problems in the crypto industry seem to be just beginning.
The echoes of the powerful collapse of FTX are still being felt in the crypto industry. On Monday, the value of digital currencies fell again as the market situation worsened over the weekend.
Some in the industry have said that the fall of FTX was “Lehman’s moment”, drawing parallels to the collapse of the investment bank in 2008, which was the starting point of the global crisis. The founder of Binance agreed with this metaphor, saying that comparing the current turmoil in the cryptocurrency market with the 2008 global financial crisis is an exact analogy.
On Friday, FTX filed for bankruptcy. However, it turned out that this is not the only crypto company that mismanages funds.
We tell you what events indicate that the crisis in the cryptocurrency market has just begun, and who can be dragged to the bottom by FTX.
Clouds are gathering around FTX
On Friday, it became known that the FTX exchange was hacked, and some assets were stolen.
According to risk management firm Elliptic, $473 million worth of crypto assets were stolen from FTX users on Friday night.
FTX claimed on the official Telegram channel that it was hacked, instructing users not to install any new updates and remove all the exchange’s apps. As a result, many FTX wallet owners found $0 on their balance.
Stablecoins and other stolen tokens were quickly converted to Ethereum on decentralized exchanges. As Elliptic explains, this is a common technique used by hackers to prevent funds from being discovered.
At the same time, investigations have already begun against FTX and its head, Sam Bankman-Freed. Thus, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) check whether the exchange has abused user funds. In addition, the Department of Justice (DOJ) has taken the organization under close scrutiny and is checking for possible fraud.
What’s more, in the Bahamas, where FTX is headquartered, police and the securities regulator have also begun investigating possible criminal activity.
The fall of FTX has deprived the US Democratic Party of additional income
Prior to the FTX collapse, Sam Bankman-Fried was the second -most donated Democrat behind George Soros, spending $36 million on the campaign trail. He also became one of the most prominent representatives of the crypto industry in Washington, supporting digital asset legislation and hiring former regulator employees as advisers.
“I don’t hold the politicians who received the Bankman-Fried donations personally responsible for this, but they may find themselves in an awkward position and will be forced to return the money,” said Columbia Law School professor John Coffey. According to him, this is exactly what many politicians did who received donations from the notorious Sackler family, who were responsible for the country’s opioid crisis.
After the FTX bankruptcy began, rumors also surfaced accusing U.S. Securities and Exchange Commission Chairman Gary Gensler of helping Bankman-Fried use legal loopholes to gain a regulatory monopoly.
Crypto.com is going down too
Crypto.com’s CRO coin sell -off began due to fears that the Singaporean crypto exchange would collapse in the same way as FTX.
These assumptions are not groundless - the exchange is potentially insolvent. According to analysts, Crypto.com holds low-liquidity cryptocurrencies as reserves, namely the Shiba Inu meme coin and its own CRO token. Such assets make up about 40% of the total.
Crypto.com CEO Chris Marszalek has denied rumors that the platform could be the next crypto giant to collapse after FTX.
According to him, the business model of the Singapore Exchange is different from that of FTX. Thus, Crypto.com reinvests the profits from trading fees to create a secure infrastructure and does not engage in lending or trading in client assets.
At the same time, the company also admitted that it accidentally sent more than $400 million in Ethereum to the wrong account. The transfer of 320K ETH was made three weeks ago to a corporate account at rival exchange Gate.io, and not to one of its standalone or cold wallets. Subsequently, the funds were returned.
In total, Crypto.com users withdrew $14 million in ETH and $39 million in other tokens over the weekend, according to Argus data.
Hedge funds also suffered
Almost half of the assets of the hedge fund Galois Capital were trapped on the FTX crypto exchange. The fund’s co-founder, Kevin Zhou, wrote to investors in a letter that while the fund was able to withdraw some of the money from the exchange, about half of the capital was still stuck in FTX. Based on the total value of assets under management as of June, that could be around $100 million. Zhou said it could take several years to recover any percentage of the frozen assets.
Industry insiders say that the fact that FTX has been used by a large number of hedge funds and viewed as one of the world’s safest crypto trading platforms means that many money managers could be stuck on the exchange.
Japanese investment conglomerate SoftBank has invested in FTX after the startup raised $400 million in a January funding round, valued at a staggering $32 billion. SoftBank said it only invested about $100 million in the company. That investment has now been written off entirely.
The head of Binance proposed a solution to the problem
At a conference in Bali, Binance CEO Changpeng Zhao made it clear that the issue of regulating the industry will not be easy.
“The natural reaction of the authorities is to borrow rules from traditional banking systems, but crypto exchanges operate in a very, very different way from banks, ” he said. “It is perfectly normal for a bank to move user assets for investment and try to make a profit. If a crypto exchange operates this way, then it is almost guaranteed to fail.”
“Regulators play a role, but no one can protect a bad player,” Zhao warned.
The head of Binance also said that the exchange will work on creating a new fund to restore the industry. This fund will be created to help projects that would otherwise be considered strong, but have fallen into a liquidity crisis.
“The impact of the recovery fund will not be felt in the short term, but may help in the overall recovery of the industry in the long term,” said Vlad Gorbunov, founder and CEO of cryptocurrency company Choise.com. “With other key players such as Tron’s Justin Sun already voicing their support for the initiative, the industry can rally to rescue other major projects that are on the verge of collapse. This will have an invaluable impact on maintaining confidence in the industry and will spur a sharp rise in crypto assets.”
What will happen to cryptocurrencies next
JPMorgan analysts believe that Bitcoin could fall to $13,000, which is almost 20% less than now.
“What makes this new phase of crypto de-leveraging, driven by the collapse of Alameda Research and FTX, more problematic is that there are fewer institutions in the crypto ecosystem with stronger balance sheets that can bail out those with low capital and high leverage.” wrote JPMorgan analysts led by Nikolaos Panigirtzoglou. According to experts, given the size and importance of FTX and Alameda Research in the crypto ecosystem, it is likely that a new cascade of margin calls, deleveraging and collapses of crypto companies and platforms is beginning, similar to what happened after the collapse of the stablecoin Terra.
Under such conditions, the “crypto winter” may become even worse, especially since fears about the economic background continue to reduce the appetite for risky assets.
“In the short term, this is going to be very, very bad for the crypto industry,” said Jay Jog of crypto startup Sei Labs. The expert does not believe that the collapse of FTX will end everything, and hopes that this event can increase interest in his business, which focuses on creating more transparent, decentralized cryptocurrency exchanges.
Shan Jun Fok, co-founder of crypto investment firm Moonvault Partners, expects the FTX crash to push institutional investors away from cryptocurrencies at the very moment they started to approach it. While some people will continue to work on interesting projects, it may take years to restore faith in the sector.
“Over the past six months, we have witnessed the unraveling of the web that has entangled the cryptocurrency space. It all started with Terra, but now it turns out that Bankman-Fried is also insolvent,” says Sean Farrell, Head of Digital Asset Strategy at FundStrat. The expert expects new lows in the market, as he believes that there will be other victims, and this may lead to forced sales.
BitBull Capital CEO Joe DiPascual believes that despite bitcoin currently trading at $16,000, the extent of the damage to other companies, funds and exchanges from the fall in FTX is not yet known, but will become clear in the coming weeks.
“As before, we believe that BTC below $20K is an attractive area for long-term accumulation, but we also remain cautious until the current situation is resolved and sentiment begins to normalize. It is noteworthy that in the last few days there has been a significant drop in the exchange reserves of BTC and stablecoins, which indicates a lack of confidence and the prevalence of fear in the market,” DiPascual said.
According to David Duong, head of institutional research at Coinbase, the relative stability of the cryptocurrency market in recent months has been disrupted. It is not yet clear to the expert which counterparties could lend to or interact with FTX or Alameda and what their obligations are. According to Duong, bitcoin can not only retest the lows of 2022, but also touch the $13,000 level.