Chaos in cryptocurrencies continues as FTX CEO Sam Bankman-Fried quits and the company files for bankruptcy amid news of a hack
What a tumultuous last week it has been in the crypto markets. And the muted price action that we were witnessing the digital assets for the past many weeks proved to be the calm before the storm. The skirmishes that started between the two crypto-trading giants eventually culminated in one of them getting completely decimated. I covered the backdrop of this story in yet another contagion event to hit the Cryptoverse this year.
2022 started off with cryptocurrencies entering a bear market. The move was intensified by the multibillion-dollar collapse of the Terra/Luna stablecoin project in May. And just when things were starting to look up with equities entering the holiday season, we have to deal with another big-name collapse. Things have been pretty fluid and volatile in the crypto market everything turned south a week ago.
Let’s look at the overall picture. Since May 2022, 38 companies in the crypto industry have laid off employees, among them crypto exchanges BitMEX and Coinbase, crypto service providers Crypto.com and Blockchain.com as well as NFT marketplace OpenSea. Now, 130 companies in the FTX Group owning the crypto exchange FTX have officially filed for bankruptcy due to a liquidity crunch. Binance, the world’s largest exchange, backed out of its plans within 24 hours to buy rival FTX — leaving the latter on the verge of collapse. And indeed it did.
FTX and a number of its affiliate facing a shortfall of up to $8 billion owing to an extreme liquidity crisis filed for bankruptcy last Friday — revealing more than 100,000 creditors and tens of billions of dollars in assets and liabilities. As if this was not enough, FTX is now investigating a possible hack and moved all its digital assets offline over the weekend. The stolen assets could be worth more than $477 million, according to estimates by crypto firm Elliptic.
Worrying details that emerged just before the filing of the bankruptcy stated that FTX Trading International held just $900 million in liquid assets against $9 billion of liabilities. The broad spectrum of cryptocurrencies remained under pressure on the weekend as these details filtered through. However, major cryptocurrencies bounced after Binance Chief Executive Officer Changpeng Zhao said the world’s largest digital-asset exchange plans to set up an industry recovery fund. How long this sentiment lasts is anybody’s guess right now.
Figure 1
The fallout from the FTX saga was pretty significant as it led to a broad-based decline in the prices of major cryptocurrencies, wiping out more than a 10th of the global cryptocurrency market’s value. According to data gathered by Chainalysis, we can see how traders/investors fled to the safety of stablecoins in the wake of this event. There are two ways to do this — trading for stablecoins pegged to fiat currencies like the U.S. dollar, or liquidating entirely and swapping cryptocurrency for fiat.
More often, it is the earlier case, when users tend to seek safety and stability temporarily before things settle down, and they swap back to cryptocurrencies. Switching to fiat currency indicates a more permanent move, fearing all hell’s breaking lose. As you can see in the chart above (Figure 1), stablecoin transaction volumes grew steeply as FTX’s situation continued to worsen, blowing past their two-week highs. The data suggests that many investors indeed fled to stablecoins as markets became volatile.
Figure 2
But what about the extremely panicked investors, who swapped to fiat currencies fearing the worst? For that, we have to look at the second chart (Figure 2). The situation here is similar to that of stablecoins, though the increase is less pronounced. A steady uptick in crypto-for-USD trades began on November 7, followed by large spikes on November 8, and remained at elevated levels through the end of the day on November 10. Since then, they have returned closer to normal levels. The bigger picture — more investors have re-aligned their positions, only temporarily.
If Binance wasn’t already a dominant player in the crypto exchange landscape, this event has further strengthened its position as the market leader. According to data aggregated by analysts at The Block (Figure 3), no single exchange even comes close to Binance’s trade volume, with transactions amounting to $4.6 trillion between January and November 11. FTX ranks fourth behind Coinbase and OKX. Although some argue that Binance itself triggered the collapse of FTX by liquidating its massive FTT holdings (FTX’s native token).
Looking at the broader picture, the cryptoverse is still a much smaller space than the legacy financial markets and any such an event sends shock waves through the whole ecosystem. Skeptics still believe cryptocurrencies still occupy a fringe niche and remain a highly speculative asset class at best — prone to such catastrophic failures. We have heard this narrative is reinforced by the global financial regulators too, but here’s the thing — they have done nothing to address the issue.
No arguing that this has been a huge negative development for the space, but crypto has survived events like this before, emerged stronger, and gone on to reach new highs. They are still evolving and growing — a lot more institutional investment has poured into the space in the past 24 months, and stronger projects with real-world use cases have thrived and will continue to do so past this noise. It’s a long road ahead…
Originally Published on Medium
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