FTX spreads contagion and anxiousness FTX spreads contagion and anxiousness FTX spreads contagion and anxiousness

FTX spreads contagion and anxiousness

Mads Eberhardt

Cryptocurrency Analyst

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, citingabnormal 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.

Exchange Balance of Bitcoin and Ethereum in Units. Source: Santiment
Exchange Balance of Bitcoin and Ethereum in Percent. Source: Santiment


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.