The shocking collapse of the FTX exchange, one of the biggest and most reputable players in the market for digital assets, sounds alarm bells Among those who own cryptocurrencies, as investors run for cover.
There are still many open questions. But two big questions loom large: How far will the damage go, and will the devastated cryptocurrency industry be able to bounce back?
Industry insiders are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, the “Lehman Moment,” referring to the 2008 investment bank failure that shocked the world. Many consider it an apt comparison.
What is clear is that the effects of the FTX crisis have caused major upheavals in the cryptocurrency ecosystem. The episode destroyed confidence and encouraged regulators, who are now on high alert.
“It was one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jogg, co-founder of California-based blockchain startup Sei Labs. has said.
“Shutstorm.” “Insane.” “Chaos.”
These were used by crypto investors and pundits to explain the failure of FTX, which was launched in 2019 by 30-year-old phenom Sam Bankman-Fried, once hailed as the modern-day JP Morgan. terminology.
The company, valued at $32 billion in its latest funding round, has enlisted big names like Tom Brady, Gisele Bündchen and Naomi Osaka, as well as prominent backers like SoftBank, Tiger Global and Singapore’s Temasek. The name is on the arena where his Miami heat plays.
This week, investor Sequoia Capital Said It had reduced the value of FTX stock to $0. The exchange is said to be short of between $8 billion and $10 billion and has been unable to meet customer withdrawal requests. Bankman-Fried resigned on Friday and FTX filed for bankruptcy protection in the US after bailout from his rival Binance failed.
“Everybody is a little bit shocked,” said Shang Jun Fok, co-founder of Hong Kong-based crypto investment firm MoonVault Partners. “Many people trust FTX as their gold standard.”
He likened the FTX bankruptcy to Enron, the corporate fraud scandal that led to the sudden bankruptcy of a US energy company in 2001.
The situation is still developing rapidly. One concern, however, is how it will ripple across the crypto sector, which was worth over $1 trillion in August.
As digital assets fell over the summer Bankman-Fried has put about $1 billion into bailing out companies and bolstering assets to keep the entire industry alive. Now in a pinch, he has few white knights left to rescue FTX and the others.
“The number of companies with stronger balance sheets that can bail out less capitalized and highly leveraged companies is shrinking within the crypto ecosystem,” JPMorgan strategists wrote in a note to clients this week. .
The demise of FTX could create other victims. There are obvious ramifications, but it’s difficult to know who’s being exposed at this point.
The prices of Bitcoin and Ether, the two most-held cryptocurrencies, have fallen more than 20% over the past week. It is crashing thanks to reports that it held the amount of The Tether stablecoin, purported to be a safe place to store cash, recently broke his 1:1 peg with the US dollar. Cryptocurrency lending platform BlockFi announced on Thursday, Suspension of customer withdrawals.
Traditional investors have also been hit, but reassured clients they can handle the impact. It said the loss would have “limited impact.”
Binance CEO Changpeng Zhao said: murmured While he was in a message with Salvadoran President Naive Bukele, El Salvador has fully entered Bitcoin. “We don’t have bitcoin on FTX and have never traded with them,” Zhao said from Bukele.
Analysts note that after months of upheaval, a lot of dangerous activity has already been washed out of the system.
But more pain could come as terrified investors withdraw money from cryptocurrencies. JP Morgan believes Bitcoin could fall to $13,000, down nearly 22% from now. Fok said the digital coin could fall below $10,000.
In such a climate, a “crypto winter” is poised to get even worse, especially as concerns about the broader economic backdrop continue to erode appetite for risk assets.
“In the short term, this is going to be very bad for the crypto industry,” said Jog of Sei Labs. However, he doesn’t think it will completely “finish things” and could increase interest in his business, which is focused on building a more transparent and decentralized crypto exchange. I have high hopes.
Fok said he expects the FTX demise to push institutional investors away from the crypto space. Some continue to work on interesting projects, but it can take years to regain trust in the promise of this area.
It is also almost certain that regulators will gain momentum and tighten the screws, driving up costs for crypto companies surviving the purge that is unfolding.
James Malcolm, head of foreign exchange strategy and cryptocurrency research at UBS, said: “There is a growing view that extensive regulation is needed for any type of financial company.” “Perhaps by 2024, the world as a whole will look more cohesive and complete.”
U.S. Securities and Exchange Commission chief Gary Gensler said on CNBC Thursday that while the crypto space is regulated, investors “need better protection.” The Wall Street Journal reported that the SEC and the US Department of Justice are investigating FTX. (The Justice Department declined to comment.)
At a conference in Indonesia on Friday, Binance’s Zhao said the 2008 financial crisis was “probably an accurate analogy” to what was really happening.
“We’ve taken a few years back,” he said. “Regulators are understandably going to scrutinize the industry more intensely, which is probably a good thing, to be honest.”
— Allison Morrow contributed to the report.