FTX spreads contagion and anxiousness
Summary: The collapse of FTX has spread contagion, as one of the largest trading firms has partially halted operations. It appears that many investors are anxious about further insolvency, as billions of dollars are flowing from centralized exchanges to self-custody, which may fuel additional contagion in the next couple of weeks.
On Tuesday last week, major crypto exchange FTX halted withdrawals, following a week of dramatic events. On Friday, the exchange filed for bankruptcy after the largest crypto exchange Binance scrubbed its intent to acquire the troubled exchange the day before.
Today, the new CEO and chief restructuring officer of FTX, John Ray, filed the first declaration following the bankruptcy of FTX. On the very second page, Ray states that he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information”. For context, John Ray led the restructuring of Enron. The filing presents countless ways, in which the control of the company has been in a few hands. Further, the declaration states that Alameda Research borrowed billions of dollars from FTX, which was later lent to former FTX CEO and co-founder Sam Bankman-Fried (SBF) and other key employees of FTX.
Contagion from crypto companies to funds
As we speak, the most notable contagion has been with respect to Genesis Trading. The large trading firm announced shortly after the collapse of FTX that it had $175mn stuck on the exchange. Yesterday, Genesis announced that its crypto-lending unit is halting customer withdrawals, citing “abnormal withdrawal requests which have exceeded our current liquidity”. The firm further said that its trading and custody units remain operational, while it expects to publish a plan for its lending business next week. It appears that its parent company, namely Digital Currency Group, tries to raise money. On top of this, crypto lender BlockFi has halted withdrawals. Following BlockFi’s own collapse earlier this year, FTX was about to acquire the troubled lender, so BlockFi halting withdrawals was fairly expected. As of now, other exchanges and brokers that have come forward have allegedly lost more immaterial amounts.
Next, various funds have lost a consequential part of their assets under management, for instance, Multicoin Capital and Ikigai Capital by keeping the majority of their assets on FTX. In our view, this can for years negatively impact to which extent funds can access capital outside of the crypto space, as the trust in the latter has taken a severe hit.
Various exchanges commit to more transparency
Paradoxically, Bitcoin was created during the financial crisis in 2008 to form transparency and reduce reliance on financial intermediaries. Yet, the case of FTX indicates that the crypto market is everything but that. For crypto to evolve into more than a speculative asset class, it must return to the values that laid the foundation for its creation, instead of being a market, in which shadow banking can seemingly emerge.
Fortunately, many exchanges have stated that they intend to provide proof of reserves frequently. This includes Binance and OKX, whereas Kraken and BitMEX are already doing proof of reserves. In the future, market participants will hopefully only choose exchanges that make proof of reserves. The latter does not replace proper accounting or regulation, yet it is a step in the right direction, as the case with FTX would likely have been discovered quicker had the firm provided proof of reserves.
Funds flow from exchanges and hardware wallets are acquired
The hole in FTX’s balance sheet came as a surprise for the market, effectively spreading fear that other exchanges and brokers are facing liquidity issues or insolvency. About this, on-chain data suggests that many investors are preparing for this scenario, as billions of dollars worth of crypto assets have left exchanges in the past week. Notably, the number of Bitcoins and Ether stored on exchanges have decreased by around 240,000 BTC and 2mn Ether, respectively. Too, hardware wallet manufacturers such as Ledger and Trezor have experienced an increase in sales since the collapse of FTX.
If this outflow of funds from exchanges to self-custody continues, we are likely to realize sooner rather than later whether other companies face liquidity issues or insolvency as well. This indicates that the next couple of weeks is crucial in terms of potential greater contagion.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.