FTX the once-dominant crypto exchange, failed just as the cryptocurrency market began to see “an emerging bullish setup.” This follows significant deleveraging in May and June which left few fringe sellers in the ecosystem. According to a new study report from Coinbase Globally, the rapid decline of FTX will possibly extend the cryptocurrency bear market for several months, perhaps until the end of 2023.
Allocators have struggled to make meaningful capital deployments across the majority of asset classes in recent months due to the consistent stop-and-go behavior of financial markets. Before the perceived “clash” between Binance and FTX in early November, which caused panicked withdrawals on the latter, major cryptocurrencies have mostly been sheltered from huge price swings since early July. This quickly escalated into more widespread market turbulence, raising concerns of possible systemic danger.
Coinbase said in a post that they expect TFT to experience a second “second-order effect” brought to light by the breakup of FTX, “as it comes to light which counterparties may have lent or interact with FTX or Alameda and what those exact responsibilities are.” Recall that SBF’s quantitative trading firm, Alameda Research, was a major factor in the collapse of the 30-something crypto empire.
“There is no doubt that the crash will postpone the crypto spring,” according to ETC Group Founder and CEO Bradley Duke. He also notes that “investor confidence in crypto has taken a serious hit and the repercussions of this event will continue to be felt for some time to come.”
Could FTX have a hole in its financial statements?
It was recently revealed that FTX might have a $8-10 billion hole in its balance sheet, which could be related to a loan or loans to Alameda that were pledged to FTT as collateral and funded by customer deposits. Onchain data implies that transfers from FTT to Alameda took place during the defaults of Terra, Celsius and Three Arrows Capital in 2Q22, indicating that the market has yet to recover from the deleveraging consequences of these unwinds. Due to FTT’s 85% depreciation against the US dollar between Nov. 6 and Nov. 10, margin calls on all existing loans were likely issued.
Sam Bankman-Fried and his (former) CEO acknowledged in a tweet that the current solvency problem resulted from incorrect calculation of client margin spreads.
The company has since declared bankruptcy, joining Trading Ltd, FTX US, Alameda and 131 other related entities. However, given that there are no clear commercial law precedents for cryptocurrencies and that many transactions have taken place overseas, we believe that the case may present major legal complexities. Although the problem has contributed to market turbulence more generally, the bankruptcy proceedings could reduce the risk of contagion as US courts seek a safe solution.
New FTX CEO
This week, “Enron man” John Ray III, who oversaw the company’s cleanup after its widely publicized crisis, was named the new CEO. Ray wasted no time in criticizing FTX’s former leadership. Sam Bankman-Fried, the company’s founder, and his management team have been accused of showing a “total breakdown of corporate controls”.
FTX’s bankruptcy filing also produced several shocking revelations. For starters, Alameda Research, the sister company of FTX, was secretly shielded from exchange liquidations. The document also demonstrated how private keys and other sensitive information were accessed through unsecured group emails.
Another salvo in the saga saw a major update this week. This time it was the entity that allegedly hacked into the platform during the initial collapse. Dubbed “FTX drainer”, this wallet is now a major holder of Ether.