The stunning fall of the FTX exchange, one of the biggest and most trusted players in the digital asset market, is causing alarm among people who own cryptocurrencies as investors run for cover.
There are still many unanswered questions. But two big ones stand out: How far will the damage spread? And can the broken cryptocurrency industry recover?
Industry insiders are debating whether to call the collapse of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” referring to the 2008 collapse of the investment bank that shocked the world. Many believe it is an apt comparison.
What is clear is that the fallout from the FTX crisis is introducing significant instability into the crypto ecosystem. The episode destroyed confidence and emboldened regulators, who are now on high alert.
“This has been one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jog, co-founder of California-based blockchain startup Sei Labs.
“Sh*tstorm.” “Insane.” “Chaos.”
These are terms crypto investors and pundits have used to describe the failure of FTX, which was started in 2019 by Sam Bankman-Fried, a 30-year-old wunderkind who was once hailed as a modern-day JP Morgan.
The company was valued at $32 billion in its latest funding round and had recruited high-profile backers including SoftBank, Tiger Global, Singapore’s Temasek, as well as celebrities such as Tom Brady, Gisele Bündchen and Naomi Osaka. His name is on the arena where the Miami Heat play.
This week, investor Sequoia Capital said it had marked the value of FTX’s stake at $0. The exchange — said to be worth between $8 billion and $10 billion — has been unable to meet customer withdrawal demands. Bankman-Fried resigned on Friday and FTX filed for bankruptcy in the United States after a failed bailout by rival Binance.
“Everyone is a bit shocked,” said Shan Jun Fok, co-founder of Moonvault Partners, a Hong Kong-based crypto investment firm. “Many people trusted FTX as the gold standard.”
He compared the collapse of FTX to Enron, the 2001 corporate fraud scandal that resulted in the US energy company’s sudden bankruptcy.
The situation is still evolving rapidly. But one concern is how it could ripple through the entire crypto sector, which was worth more than $1 trillion in August.
Over the summer, as digital assets plunged in value, Bankman-Fried set aside about $1 billion to rescue companies and shore up assets to try to keep the entire industry alive. Now, few white knights are left to save FTX and others in danger.
“The number of entities with stronger balance sheets that can bail out those with low capital and high leverage is shrinking within the crypto ecosystem,” JPMorgan strategists said in a note to clients this week.
The collapse of FTX could cause more casualties. It’s hard to know at this point who is exposed, although there are clear ripples.
The prices of bitcoin and ether, the two most popular cryptocurrencies, are over 20% lower in the past week. The price of Solana digital currency has also been hit thanks to reports that Bankman-Fried’s trading firm, Alameda Research, had significant holdings. The Tether stablecoin, which is supposed to be a safe place to park cash, recently broke its one-to-one peg with the US dollar. And cryptocurrency lending platform BlockFi said Thursday it was halting customer withdrawals.
Traditional investors have also been burned, although they reassure clients that they can handle the fallout. The Ontario Teachers’ Pension Plan said that despite the uncertainty, losses associated with its $95 million investment would have a “limited impact” given that the stake represents less than 0.05% of total assets.
Changpeng Zhao, the CEO of Binance, tweeted that he was messaging with Nayib Bukele, the president of El Salvador, which used bitcoin. “We don’t have Bitcoin in FTX and we’ve never had any business with them,” said Bukele’s Zhao. “Thank God!”
Analysts note that many dangerous activities have already been flushed out of the system after a turbulent few months.
But as spooked investors pull capital out of crypto, more pain could ensue. JPMorgan believes bitcoin could fall to $13,000, a drop of nearly 22% from where it is now. Fok said the digital currency could fall below $10,000, a low it hasn’t fallen to since 2020.
In this climate, the “crypto winter” is set to get even worse, especially as fears about the broader economic environment continue to erode appetite for risk assets.
“In the short term, this is going to be very, very bad for the crypto industry,” Sei Labs’ Jog said. However, he doesn’t think it will “end things” completely and hopes it could boost interest in his business, which is focused on creating more transparent, decentralized crypto exchanges.
Fok said he expects the FTX collapse to push institutional investors away from the cryptocurrency space, just as they had primed him to do. While some people will continue to work on interesting projects, it may take years to restore faith in the industry’s promise.
It is also certain to encourage regulators to tighten the screws, raising costs for crypto companies that survive the unfolding liquidation.
“It reinforces the view that any kind of financial business needs extensive regulation,” said James Malcolm, head of currency strategy and crypto research at UBS. “Probably by 2024, the whole world will look much more cohesive and airtight.”
Gary Gensler, head of the US Securities and Exchange Commission, told CNBC on 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 is “probably an accurate analogy” for what’s happening.
“We’re a few years behind,” he said. “Regulators will rightly look at this industry much, much harder, which is probably a good thing, to be honest.”
— Alison Morrow contributed reporting.
