FTX woes likely to cause contagion with more pain to come, analysts say

The potential fall of FTX.com could cause “more pain” given the number of businesses in the ecosystem linked to the exchange, crypto market analysts say. 

Bloomberg market analyst Jamie Coutts told AIBC that he expects a landslide of negative consequences as a result of the problems at FTX, as it has “touched” so many “other businesses in the ecosystem. If the exchange declares bankruptcy, it will impact the space everywhere from hedge funds to VC and financial intermediaries,” he said. 

The crypto exchange has been suffering a “liquidity crunch” due to a substantial amount of customer withdrawal requests over the last week. 

FTX CEO Sam Bankman-Fried reportedly told investors on Wednesday that without a cash injection of $4 billion, the company would need to file for bankruptcy, according to a report from Bloomberg. The overall shortfall at FTX is said to be $8 billion.

Coutts said a potential bankruptcy could plunge the crypto markets into extreme uncertainty, noting that “there is a chance” of a domino effect, leading to “further announcements and a little bit more contagion.” 

This could be in the form of altcoins, venture capital funds, or intermediaries, fearing “there is a little more pain to come.”

Crypto exchanges seek distance

Firms were quick to announce they had liquidated their position with FTX, with Wintermute announcing on Twitter that it had “substantially further reduced” their exposure to “reflect the change in the associated risk.”

Other rival crypto exchanges also made sure to distance themselves. Ben Zhou, co-founder and CEO of ByBit reiterated in a statement sent to AIBC that “Bybit is NOT a bank, we are a custodian of our customers’ funds. We do not use those funds for any other purpose.”

“Bybit can guarantee that all clients’ assets are stored in one-to-one liquidity held in custody – available in full, on request, and without delay if requested,” he added. 

The exchange said the recent uncertainty had shone the spotlight on fund safety, custodianship, and transparency.

Coutts said the news will cause an “extension of the bear market” and is going to even have a flow-on effect on Bitcoin miners, noting that when the BTC price declines, mining operations are no longer profitable. 

He noted that even at the “$18k to $19k mark we were already seeing miners trying to raise equity,” adding that a move towards the “$16k mark” is going to cause extreme pressure for bitcoin miners.

Binance seen as king of crypto

Fred Schebesta, founder of Finder and venture capital firm Hive Empire Capital told AIBC that with FTX potentially out of the picture, “Binance is now the king of crypto.”  

He noted that it all started with “an article exposing Alameda Research’s balance sheet,” which later led to Binance CEO Changpeng Zhao announcing it would be liquidating its entire FTX Token holdings and eventually led to FTX asking Binance to acquire the company. 

Binance has since backed out of the deal, announcing via a series of tweets that after “due diligence,” the issues are “beyond” their “control or ability to help.”

Coutts said he is cautious of crypto exchange tokens such as FTX Token (FTT), telling AIBC that Bloomberg’s index solutions which “represent the top coins by market cap,” never “include the exchange tokens, such as FTX,” as they are very close in nature to a security, which we thought would be a potential problem.”  

Meanwhile, eToro market analyst Josh Gilbert was optimistic that the market will overcome this latest setback, which he sees as a black swan event. Really “these types of unanticipated events show that it’s an asset class that’s still maturing.”

Gilbert said that the “market has already begun to sell off after this event,” with “BTC dipping” to a “23-month low.”  Despite this, Gilbert said that “Bitcoin had remained relatively resilient in the lead-up to this sell-off,” but given the scale of this event believes it’s “understandable to see the current selling pressure.”

Gilbert said the “bigger worry for investors would still be the macro environment, but there’s no doubt this will have a lingering effect.” 

Calls for more transparency

“The industry will learn from some of the major blunders we have seen this year, including Luna and Celsius, which will almost certainly lead to more transparency across the space long-term, helping to bring more accountability and trust into the crypto market,” he said. 

Schebesta added that “unfortunately when there is public fear and the market loses confidence, things can move extremely fast in the crypto space,” adding that “recent collapses have made the market even more weary.”

Although Schebesta is concerned this will be “a setback to the crypto industry as it could damage regulatory progress, especially in the US,“ he believes this will be the “dawning of the power of decentralization and DeFi,” and said that it’s important to remember “non-custodial wallets over custodial wallets.”

The saga has raised even more concerns for government officials over cryptocurrency regulations, with U.S senator Cynthia Lummis releasing a statement on Nov. 8 following the initial news that Binance would be rescuing FTX. 

Lummis stated the clear need for “rules of the road for digital asset exchanges in the United States.”  The Senator highlighted the issues of “market manipulation, lending activity, and whether customer funds and assets were appropriately safeguarded,” which will be discussed amongst her colleagues over the “coming days.”

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