Crypto: What Happens After FTX Collapse Triggers ‘Lehman Moment’?

CNN Business

The spectacular collapse of the FTX exchange, one of the largest and most influential players in the digital asset market, is alarming. they run for cover among people who own cryptocurrencies, such as investors.

There are still many unanswered questions. But there are two big ones: How far will the damage spread? And can the battered crypto industry make a comeback?

Industry insiders are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” referring to the 2008 collapse of the investment bank that sent shock waves around the world. Many think this is an apt comparison.

What is clear is that the consequences of the FTX crisis are bringing significant volatility to the crypto ecosystem. The episode destroyed confidence and emboldened regulators, who are now on high alert.

“It was one of the most trusted institutions in the cryptocurrency space, so it’s going to take some time to recover,” said Jay Jog, co-founder of California-based blockchain startup Sei Labs.

“Sh*tstorm.” “Crazy.” “Chaos.”

These are the terms crypto investors and pundits used to describe the failure of FTX, launched in 2019 by Sam Bankman-Fried, a 30-year-old wonderkid once regarded as a modern-day JP Morgan.

The company was valued at $32 billion in its latest funding round and has 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 he said FTX marked down the value of its share to $0. The exchange, said to be short $8 billion to $10 billion, failed to meet customer withdrawal requests. Bankman-Fried resigned on Friday and FTX filed for US bankruptcy protection after a bailout from rival Binance ended.

“Everyone is a little bit shocked,” said Shan Jun Fok, co-founder of Hong Kong-based cryptocurrency investment firm Moonvault Partners. “Many people relied on FTX as the gold standard.”

He compared the collapse of FTX to Enron, the corporate fraud scandal that resulted in the surprise bankruptcy of the US energy company in 2001.

The situation is still evolving rapidly. But one concern is how it might ripple across the entire cryptocurrency sector, which was worth more than $1 trillion in August.

Digital assets fell over the summer worth, Bankman-Fried put in about $1 billion to bail out the firms and shore up their assets to try to keep the entire industry afloat. Now there are few white knights left to save FTX and others.

“The number of businesses in the crypto ecosystem with stronger balance sheets that can bail out those with low capital and high leverage is shrinking,” JPMorgan strategists said in a note to clients this week.

The destruction of FTX may lead to other losses. At this point it is difficult to know who is exposed, although there are clear ripple effects.

The prices of bitcoin and ether, two of the most widely held cryptocurrencies, have fallen by more than 20% in the past week. The price of Solana digital coin also fell due to news that Bankman-Fried’s trading firm Alameda Research has a large stake. The Tether stablecoin, which is supposed to be a safe place to store cash, recently broke its one-on-one peg against the US dollar. And cryptocurrency platform BlockFi said Thursday it did termination of customer withdrawal.

Traditional investors were also burned, although they reassured clients that they would absorb the loss. The Ontario Teachers’ Pension Plan said that despite the uncertainty, losses on its $95 million investment would have a “limited impact” given that they represent less than 0.05% of total assets.

Changpeng Zhao, CEO of Binance, he tweeted he said he had a message with the president of El Salvador, Nayib Bukele, who is obsessed with bitcoin. “We don’t have any Bitcoins in FTX and we’ve never had anything to do with them,” said Zhao from Bukele. “Thank God!”

Analysts note that many risky activities have already been removed from the system after a tumultuous few months.

But as spooked investors pull funds from the cryptocurrency, more pain could be coming. JPMorgan believes that bitcoin could fall to $13,000, which is about a 22% drop from today. Fok said the digital coin could fall below $10,000, a level it hasn’t fallen since 2020.

In this climate, the “crypto winter” is set to get worse, especially as fears about the broader economic backdrop continue to dampen appetite for risk assets.

“In the short term, this is going to be really, really bad for the crypto industry,” Sei Labs’ Jog said. But he doesn’t think it will completely “end things” and hopes it will increase interest in his business, which focuses on building more transparent, decentralized cryptocurrency exchanges.

Fok said he expects the collapse of FTX to drive institutional investors away from the cryptocurrency. While some people continue to work on exciting projects, it may take years to restore faith in the sector’s promise.

And emboldening regulators to tighten the screws is sure to raise costs for crypto firms that survive the ongoing purge.

“This reinforces the view that any financial institution needs extensive regulation,” said James Malcolm, head of currency strategy and cryptocurrency research at UBS. “Probably by 2024, the whole world will look more fit and waterproof.”

The head of the US Securities and Exchange Commission, Gary Gensler, said on CNBC on Thursday that despite the regulation of the cryptocurrency space, investors “need better protection”. The Wall Street Journal reported that the SEC and the US Department of Justice are investigating the FTX. (The Ministry of Justice declined to comment.)

Binance’s Zhao said at a conference in Indonesia on Friday that the 2008 financial crisis is “probably an accurate analogy” for what happened.

“We’re set back a few years,” he said. “Regulators will rightfully scrutinize this industry much, much harder, which is probably a good thing to be honest.”

— Allison Morrow contributed reporting.

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