The news of Binance, the biggest crypto exchange in the world, acquiring its major rival, FTX, made the entire industry question the future of cryptocurrencies. However, things got even worse yesterday as Binance announced that it was pulling out of the deal. The resulting collapse of FTX, the second major crypto exchange, may turn out to be one of the biggest lapses the industry has seen.
The events, as well as comments from the owners of the said exchanges’, and crypto experts, caused a massive decline in cryptocurrencies. FTT, the token connected to FTX, dropped 90% since Tuesday.
Source: Match-Trader Pro
FTT market cap has fallen below $340 million, down from around $3 billion at the start of the week, according to CoinGecko data. FTT token has dropped 40% in the last 24 hours, SOL 20% and BNB 7%.
Binance coin (BNB)
Source: Match-Trader Pro.
Source: Match-Trader Pro.
How will the FTX collapse affect the crypto industry?
As the CEO of FTX, Sam Bankman-Fried was the figure most active in lobbying and convincing US lawmakers to regulate crypto. His decisions were known to support that, and during the crypto winter, Bankman-Fried was called the “white knight” for the cryptocurrency space. Some even compared him to J.P. Morgan and Warren Buffet. Now, industry experts fret that the collapse of his company may jeopardise the entire cryptocurrencies regulatory framework before it even exists.
The company itself was one of the most trusted entities in the crypto space, actively combating the regulatory storm the industry has been facing (e.g. by removing high leverage in 2021). Bankman-Fried himself was famous for acquiring and saving other companies. This week’s events made market participants and experts question whether the second major crypto exchange and its co-founder and CEO deserve trust.
A few days ago, Coindesk found that the majority of Alameda Research’s holdings (the company owned by the CEO of FTX) are $5.8 billion in FTT tokens and $1.2 billion in Solana tokens (the coin supported by the Bankman-Fried). Alameda has potentially tried to sell SOL to support its business. Sam Bankman-Fried, famously known for advising not to use internal leverage, did just that.
The overexposure of Alameda Research to FTT has been since denied by its CEO, Caroline Ellison: “A few notes on the balance sheet info that has been circulating recently: – that specific balance sheet is for a subset of our corporate entities, we have > $10b of assets that aren’t reflected there”. Unfortunately, the entire situation has already rippled into different areas, and there is no way to turn back the time. As FTX lost its strong position in the market, Binance is seemingly growing stronger. It still has a long way to go in gaining trust, however, both from market participants and legislators.
The dust hasn’t even settled yet, and the US lawmakers are already announcing they will take a closer look at the entire issue. The top Republican on the House Financial Services Committee, Patrick McHenryof from North Carolina, stated that they plan on “learning more from FTX and Binance in the coming days about these events and the steps they will take to protect customers during the transition.”
Experts believe the FTX’s predicament to be yet another call for a regulatory framework. Nigel Green, CEO of financial advisory and asset management firm deVere Group, says that “cryptocurrencies must come into the regulatory tent and be held to the same standards as the rest of the financial system.“
Does the FTX failure mean the industry as a whole will fail as well?
Industry experts and media are speculating that the FTX collapse and its repercussions may become another Lehman Brothers case, which would lead to a big market failure, similar to the collapse of 2008. A crypto investor, Katherine Wu, tweeted that Tuesday, when the news about Binance acquiring FTX hit the light of day, was a “truly sickening news day- can’t even begin to assess the potential damage our industry will have to face.”
Knowing FTX’s position in the global crypto market, it is still too soon to tell how these events will affect the industry in the long run. As we read in the New York Times, the companies that invested in the FTX, such as Sequoia Capital, Lightspeed Venture Partners and SoftBank, may lose all of their investments. What is certain is that Binance’s dominance will shake the future of Crypto regarding decentralising the crypto market. What’s worth mentioning, the decisions and comments from Changpeng Zhao, Binance CEO, make investors question his morale, which will definitely affect his efforts to dominate the market.
At the moment, we witness another panic in Crypto Markets, similar to the one from the 7th of May when the UST began to break its peg to the US dollar. Investors carefully observing the market were taking the contagion risks into account, which made USDT Stablecoin drop by 3%, breaking the 1$ peg. That may cause investors to stop trusting cryptocurrencies altogether. The instability of the USDT would mean billions of dollars lost.
Current market conditions have speculators debating why investors should store their Crypto in hard wallets and why they shouldn’t put their faith in crypto exchanges. Crypto winter may potentially continue as BTC falls below $16,000, price levels unseen since 2020.
As we read on MarketWatch, “Events like this create short-term forced selling that drives down the market,” noted Matthew Hougan, chief investment officer at Bitwise Asset Management. “For a period of time after this, which could be months, investors will be hesitant to come back into the market for fear that there’s another shoe to drop,” Hougan said.
JPMorgan Chase & Co.’s Nikolaos Panigirtzoglou, in the note to clients, said that “it looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting similar to what we saw last May/June following the collapse of Terra”.
Brave investors might grasp such events as another potential opportunity to acquire more BTC, hoping for green days. Major investors wonder, however, if the collapse of such a giant as FTX means the upcoming collapse of the entire crypto market. As the Bankman-Fried said himself in an interview for Forbes in 2021: “There’s a wide world out there. We shouldn’t think that crypto is going to be the most fertile ground to work in forever.”