Analysis-FTX Debacle Sparks Investor Rethink Of Battered Crypto Market

Analysis-FTX Debacle Sparks Investor Rethink Of Battered Crypto Market

By Gertrude Chavez-Dreyfuss and Elizabeth Howcroft

NEW YORK/LONDON (Reuters) – With major cryptocurrency exchange FTX on the brink of collapse, some investors are beginning to question the viability of a sector already bruised by the bitcoin bubble bursting and closures of key market players.

Crypto markets have come under intense pressure this year, as rising interest rates prompt investors to ditch risky or speculative assets. The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and hedge fund Three Arrows Capital, had rung alarm bells even before the fiasco at FTX, headed by Sam Bankman-Fried.

He was racing on Thursday to find finance to prop up his embattled crypto exchange, according to a Slack message to FTX staff seen by Reuters, after rival Binance scrapped a proposed bailout following a review of the company’s structure and books.

A spokesperson for FTX did not comment on the Slack message. Bankman-Fried later said in a series of tweets that FTX was seeking to raise liquidity.

Some in the industry say this fundraising challenge could be beyond him, however, as concerns over patchy oversight and counterparty risk begin to overwhelm likely returns from the asset class, at least in the near-to-medium term.

“From a financial side, it’s fair to say that confidence is going to be somewhat shaken because if you can’t trust FTX then what can you trust?” Yat Siu, co-founder of Hong Kong-based investor Animoca Brands, told Reuters on Wednesday.

FTX’s swift fall from grace followed heavy speculation about its financial health that triggered $6 billion of withdrawals in just 72 hours earlier this week. The company had published a valuation of $32 billion as recently as January.

“What makes this new phase of deleveraging more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem,” analysts at JP Morgan said in a note to clients.

“Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue.”

Speaking at the Token2049 crypto conference in London on Wednesday, Andrei Kazantsev, global head of crypto trading at Goldman Sachs said “counterparty risk is starting to be top of mind” for some clients once drawn to crypto trading by high volatility and yield.

Unlike traditional corporations and financial firms, crypto entities operate in a regulatory gray area. For instance, deposits at crypto lenders are not insured by the government.

In the case of FTX, U.S. residents can’t trade on its global platform due to strict regulations for the crypto space in the United States. FTX has a U.S. partner, FTX.US, but its offerings are more limited than the global platform.

Ken Lo, co-founder at Hong Kong-based crypto exchange and custodian Hong Kong Digital Asset Exchange, said counterparty risk, which comes from a lack of transparency and information disclosure, underscores the need for “clear regulatory framework and vision statement.”

‘POSTER CHILD’ NO MORE

Bankman-Fried, 30, who is from California but lives in the Bahamas where FTX is based, had in recent months been seen as a crypto white knight, salvaging beleaguered crypto firms that faltered as prices cratered.

In an interview with Reuters in July, Bankman-Fried said his company still had a “few billion” on hand to shore up struggling firms that could further destabilize the digital asset industry.

“The show must go on, the industry needs to keep growing, but it’s definitely a step-back in itself when you see the poster child of the industry being put in this position,” said Jean-Marie Mognetti, chief executive of crypto asset manager CoinShares.

“The people who are the best of all of us, end up being the ones to disappoint the industry. But it is a lesson which seems to keep repeating itself,” he added, citing certain star traders in various companies that ended up in trouble.

While the meltdown would not stop companies from creating new blockchain-based products, Animoca’s Siu said it “probably will create a little bit of a chill effect” for institutional investors entering crypto markets. Market sentiment took a big hit in the hours immediately after the extent of FTX’s troubles became clear, as caution spread to other digital currencies.

Bitcoin, the biggest cryptocurrency by market value, hit a two-year low of $15,632, down about 77% from an all-time peak of $69,000 hit in November 2021. Ether, the next largest, extended losses on Wednesday to hit its lowest since July.

FTT, the smaller token tied to FTX, plunged. Its market cap dropped to around $360 million, down from around $3 billion at the start of the week, according to CoinGecko data.

Max Boonen, co-founder of digital asset liquidity provider B2C2, said FTX’s problems have set the crypto space back by six months. Speaking at the Token2049 crypto conference in London, he suggested that investors will to have to rely more on credit asset managers doing due diligence on private financials.

GRAPHIC: Top crypto exchanges by volume https://graphics.reuters.com/FINTECH-CRYPTO/jnpwygnndpw/chart.png

(Additional reporting by Georgina Lee in Hong Kong; Editing by Sinead Cruise, Alden Bentley, Sam Holmes and Catherine Evans)