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Contagion Fears Sweep Crypto Sector After FTX Liquidity Crunch

Contagion fears are sweeping the crypto industry as market participants race to determine who is exposed to Sam Bankman-Fried’s secretive digital asset trading company Alameda Research.

Alameda, a proprietary trader, has been a low-key part of the entrepreneur’s crypto empire but is at the center of the storm that has engulfed his FTX crypto exchange.

Market concerns over Alameda’s financial health accelerated, triggering a wave of client withdrawals at FTX and prompting Bankman-Fried to seek a rescue of the big rival Binance.

As the impact of shock affair set up, traders feared that the collapse of Alameda, one of the biggest traders on FTX, would reverberate through the markets at rapid speed.

“[Alameda] will endeavor to liquidate the assets on their books to meet their debts, which are numerous. In addition to loans due to FTX, Alameda is also actively involved in decentralized finance,” said Sean Farrell, head of digital asset strategy at Fundstrat, a market research provider. “There are sufficient reasons to believe that the risk of further contagion remains.”

Binance declined to say whether its plans to buy FTX include the trading company. A bailout could help protect the digital asset industry and the exchange’s customers from further fallout, but would add to the risks of the deal.

Crypto traders widely assumed that Binance would leave Alameda to fend for itself and that the unwinding of its positions would inflict further pain on the digital asset market already reeling from the near collapse of FTX and a two-thirds drop in price. asset value this year. .

“Crypto players react faster to news and rumors, which creates a liquidity crisis much faster than what we would have seen in traditional finance,” said Fabian Astic, head of decentralized finance and digital assets at Moody’s, the rating agency.

Bitcoin, the largest cryptocurrency, fell 5.4% to $17,700, near its lowest level in two years on Wednesday, while Ethereum fell 9.2%. Overnight shares in Coinbase, the crypto exchange, fell 10.8%.

Galaxy Digital, the crypto financial group of US billionaire Mike Novogratz, said on Wednesday it had exposed nearly $77 million in cash and digital assets to FTX, of which $47.5 million was withdrawn.

Others rushed to reassure the market that they are not exposed to the exchange or FTT, the in-house currency for trading on FTX. Brian Armstrong, chief executive of Coinbase, said his firm has “no material exposure to FTX or FTT (and no exposure to Alameda).”

Most at risk will be companies that have loaned assets to Alameda and crypto projects the trading company has invested heavily in, stakes it may now be forced to sell in order to balance its books.

The company was a major backer of Solana, a blockchain rival to Bitcoin, which lost up to 50% of its value against the dollar overnight Wednesday, before paring losses in a volatile trade.

“I don’t see a situation where [Alameda] comes back from that. . . I think they were betting a lot on the value of this FTT token,” a person familiar with the matter said. “Alameda should have been able to fix this if they actually had what they said they had, and this is a clear signal that they don’t.”

Jon de Wet, chief investment officer at crypto wealth manager Zerocap, which has traded with Alameda in the past, said Alameda was until recently seen as a strong counterparty for lenders and hedge funds in the financial sector. cryptography.

“Alameda was a respected company,” he said. “I think there will be a lot of companies that would have had exposure at Alameda.”

The trading company was founded in 2017 by Bankman-Fried to seek arbitrage opportunities in different countries and exchanges in the nascent market for crypto assets, and has since expanded its activities.

“Alameda came before FTX. It would take its balance sheet and provide liquidity on exchanges and earn a spread. It would also take directional bets like prop trades,” de Wet said.

The extent of the pain will depend on whether or not Binance supports Alameda. Late Tuesday, an FTX spokesperson told the Financial Times that “Alameda is included in the deal.”

Binance has refused repeated requests for clarification of its position. His silence will likely reinforce the opinion of market participants who assume that the trading company will be allowed to fail.

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