The collapse, in a matter of days, of FTX, one of the main players in the cryptocurrency market, and the surprise, then aborted, rescue attempt of Binance have confused investors and regulators.
After the deflation of the bubble and the difficulties of smaller intermediaries, it is the most emblematic players of the crypto sphere that appear in turn vulnerable to the slightest attack.
Lack of regulation, the concentration of activity on a few platforms, inbreeding ... the flaws of the crypto universe are coming to light. And the collapse of FTX, valued at 32 billion euros only a few months ago, leaves many questions unanswered. Here are at least six of them.
1. Even if Binance did not take over FTX, is this a victory for Changpeng Zhao?
By presenting himself for a few hours as the savior of FTX, one of its main competitors on the verge of a liquidity crisis following the withdrawal of its customers, Changpeng Zhao (CZ) the boss of Binance (the world's leading crypto exchange platform), almost pulled off a master stroke.
In a note sent to his employees, revealed by the Financial Times, CZ was keen to play it modestly, stating moreover that the potential bailout of FTX was not a “victory.” The affair has “severely shaken” confidence in the cryptocurrency sector and will prompt regulators to be more careful, especially in their allocation of “licenses around the world,” he believes.
CZ also defends itself from having “planned this deal or anything else,” when it said last weekend that Binance would sell more than $500 million worth of FTT tokens (FTX's digital tokens). In the end, the buyout will not go through. An initial review of FTX's accounts revealed a $6 billion hole between assets and liabilities. A financial hole that was not to the liking of CZ, which preferred to withdraw its takeover offer.
Despite everything, CZ has emerged stronger from this episode, because while the others are falling, its Binance platform continues to strengthen and it is he who gives lessons to others. Be careful, however, because we have seen in recent months that this crypto winter was ruthless and could strike anyone who has not been careful ...
2. Will regulators toughen their approach?
Added to this would be investigations by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) into whether Sam Bankman-Fried's firm (SBF) has properly managed its clients' funds. Regulators are also looking closely at the links between the various entities in Sam Bankman-Fried's empire, FTX.com, FTX US, and Alameda Research.
The SEC's investigation reportedly began several months ago into FTX US and its cryptocurrency lending business. CZ, the boss of Binance, actually tweeted that “regulators will be scrutinizing crypto exchanges even more” and that he was prepared for it.
The deal between the two major players in the industry could have also posed a problem for the various competition authorities, but this topic seems to be extinguished since CZ decided not to buy FTX. Although Binance did not disclose where it was based, and the two platforms do not necessarily operate in the same countries, the antitrust authorities could have been interested in where the customers and revenues are located.
The U.S., European and British authorities could all be interested in the transaction. More broadly, the situation could lead regulators to take a closer look at the practices of crypto companies so that they provide more guarantees to customers.
3. Should inbreeding between actors be limited?
The fall of FTX is a reminder of the close financial ties between centralized platforms, DeFi protocols, and Blockchains. Ties woven by the ownership and circulation of the various tokens developed by these entities irrigate the entire ecosystem. For FTX, it was the $530 million sale of its own token, by its direct competitor Binance, that caused panic in the markets.
Many DeFi platforms also offer to make crypto loans in exchange for depositing collateral in the form of another crypto. The collapse of the Luna token, for example, precipitated the bankruptcy of the Celsius platform, which had too much exposure to the asset to survive the drop in its value.
With the pressure currently being put on FTX, it is another Blockchain that is in turmoil. FTX is a major backer of Solana, whose SOL token has seen its price halved in a matter of days.
4. Will the cryptocurrency market be permanently weakened by the FTX storm?
The rebound caused by the news of FTX's takeover by Binance on Tuesday evening, November 8, 2022, quickly fizzled out. Bitcoin hit a 2-year low of under $16K, and the entire market went down with it.
The rapid collapse of FTX and a possible merger between two major players in the industry worried competitors and damaged the image of “decentralized finance.” “It's not good for anyone,” Binance's boss stressed.
FTX was one of the most successful companies in the sector, and its model was still under attack. The records of November 2021 are now a distant memory. Rising interest rates have led to a decline in investment in the sector and a correction in valuations. Bitcoin had stabilized around $20,000 in recent months after a record high of over $64,000, while the overall market saw its capitalization drop from $3 billion to $1 billion in one year.
With this slowdown, several companies have announced layoffs after hiring heavily last year. The winter of cryptos has taken hold permanently with the Terra deal in May 2022. The fall of this stable currency backed by the dollar revealed the fragility of some players: the exchange platform Celsius went bankrupt, followed by the broker Voyager Digital.
At the time, a certain Sam Bankman-Fried had offered to rescue Celsius ... Confidence was finally damaged by numerous cases of portfolio theft and Ponzi pyramids, which had sown doubts about the security of customers' assets.
As always, the abuses of some lead to damage to the whole sector. During a crypto winter, it is even more blatant, as nothing is forgiven, and only the most serious players survive!
5. Can the cryptocurrency crisis spread to traditional assets?
The risks of contagion appear more than limited. There is certainly a correlation between cryptocurrencies and the Nasdaq. But it has tended to weaken lately. On Tuesday, November 8, 2022, the Nasdaq closed higher while cryptos were suffering the backlash of the crisis at FTX.
Furthermore, while major financial players like Goldman Sachs have begun to take an interest in the crypto sector, this is only a tiny part of their business. Even if they were to lose everything, it wouldn't make much of a difference to their bottom line.
The impact is likely to be far more devastating for individuals who believed in the promise of cryptocurrencies and invested a significant portion of their savings in the sector.
As such, always the same golden rule to remember: get your cryptos off the exchange platforms. To help you do this, remember this famous meme: Not your Keys, Not your Coins.
6. Does the fall of FTX mean that the market will finally be purged of its speculative excesses from the previous bubble?
The fall of FTX has certainly deflated the valuations of cryptocurrencies and the listed stocks associated with the sector, which were already in bad shape due to the Fed's monetary tightening.
The Coinbase platform, the only competitor of FTX and Binance to be listed on the stock market, has thus fallen by more than 10% on Wall Street on Tuesday, November 8, 2022, while the Nasdaq index, of which it is a member, had closed up by 0.5%. Its share price has been divided by more than 7 compared to its historical peak reached just one year ago, and its capitalization has melted from 75 billion dollars to a little over 10 billion.
Along with unprofitable tech stocks and SPACs, cryptos were one of the 3 big bubbles that formed during the COVID-19 crisis. For investors exposed to these stocks, the bursting of these bubbles is certainly painful, but it allows for a cleanup of the sector, a necessary step to hope to start again on a good footing in the months and years to come.
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