Crypto: What’s next as FTX collapse leads to ‘Lehman moment’?

London
CNN Business
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The amazing meltdown From the FTX exchange, one of the largest and most well-known players in the digital asset market, raises concern Among the people who own cryptocurrencies as investors compete for coverage.

There are still many unanswered questions. But two big types loom: How far will the damage spread? Can the defeated cryptocurrency industry return?

Industry insiders debate whether to call the implosion of FTX, which I filed for bankruptcy on Friday, “Lehman’s moment,” referring to the investment bank’s 2008 collapse that sent shock waves around the world. Many think it’s an apt comparison.

What is clear is that the fallout from the FTX crisis is injecting significant volatility into the crypto ecosystem. This incident has destroyed confidence and emboldened the organizers, who are now on high alert.

“This was one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Goog, co-founder of California-based blockchain startup Sei Labs.

“Sh*tstorm.” “crazy.” “Mess.”

These are the terms cryptocurrency investors and pundits have used to describe FTX failedLaunched in 2019, Sam Bankman-Fried is a 30-year-old man who was once hailed as the modern-day JP Morgan.

The company was worth 32 billion dollars In its recent funding round, it has recruited prominent backers including Singapore’s SoftBank, Tiger Global and Temasek, as well as celebrities such as Tom Brady, Gisele Bündchen and Naomi Osaka. Her name is on the scene Where do the Miami Heat play.

This week, investor Sequoia Capital He said She has set the value of her stake in FTX to $0. The exchange – which was said to be short between $8 billion and $10 billion – was not able to meet clients’ withdrawal requests. Bankman-Fried resigned on Friday and FTX filed for bankruptcy protection in the United States after a rescue plan from rival Binance failed.

“Everyone was a little bit shocked,” said Chan Jun Fook, co-founder of Moonvault Partners, a Hong Kong-based crypto investment firm. “Many people trust FTX as the gold standard.”

Compare the collapse of FTX to Enron, the 2001 corporate fraud scandal that led to the sudden bankruptcy of the US energy company.

The situation is still developing rapidly. But one concern is how it could spread throughout the entire crypto sector, which was Worth over $1 trillion in August.

During the summer, as digital assets declined In Value, Pinkman Fried Asking about $1 billion To save businesses and prop up assets to try to keep the entire industry afloat. Now, only a few White Knights are left to save FTX and others in distress.

“The number of entities with strong balance sheets that are able to bail out those with low capital and high leverage is shrinking within the cryptocurrency ecosystem,” JPMorgan strategists said in a note to clients this week.

The demise of FTX may lead to further losses. It’s hard to tell who’s exposed at this point, although there are clear ripple effects.

The prices of Bitcoin and Ether, the two most-held cryptocurrencies, have fallen by more than 20% over the past week. The Solana cryptocurrency price has also been hit thanks to reports that Bankman-Fried trading firm Alameda Research has large holdings. The stablecoin Tether, which is supposed to be a safe place to deposit cash, recently smash One-to-one link to the US dollar. Cryptocurrency lending platform BlockFi said Thursday that it was Temporarily suspend customer withdrawals.

Conventional investors have also been hit, even though they reassure clients that they can handle the fallout. Ontario Teachers Pension Scheme He 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, CEO of Binance, chirp He was communicating with the President of El Salvador, Neb Bukele Bitcoin is all gone. Bukele’s Zhao quotes: “We don’t have any Bitcoin in FTX and we haven’t had any business with them.” “Thank God!”

Analysts note that much of the risky activity has already been removed from the system after a turbulent few months.

But with panicked investors withdrawing funds from cryptocurrencies, more pain may arrive. JP Morgan He believes that Bitcoin could drop to $13,000, down nearly 22% from where it is now. Fock said the digital currency could drop below $10,000, a low that has not fallen since 2020.

In this climate, the “crypto winter” is poised to get worse, especially as concerns about the broader economic backdrop continue to erode the appetite for risky assets.

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

Fock said he expects the collapse of FTX to push institutional investors away from the crypto space just as they have been preparing for it. While some people will continue to work on interesting projects, it may take years to regain confidence in the sector’s promise.

It is also sure to encourage regulators to tighten the screws, increasing costs for crypto companies that survive the purge that has unfolded.

“It reinforces the view that any type of financial institution needs extensive regulation,” said James Malcolm, head of foreign exchange strategy and crypto research at UBS. “Maybe by 2024, the entire world will appear more compact and watertight.”

While the crypto space is regulated, investors “need better protection,” US Securities and Exchange Commission Chairman Gary Gensler told CNBC Thursday. The Wall Street Journal reported that the Securities and Exchange Commission and the US Department of Justice FTX investigation. (The Department of Justice declined to comment.)

At a conference in Indonesia on Friday, Binance’s Zhao said that the 2008 financial crisis “may be an accurate analogy” of what is happening.

“It’s been a few years back,” he said. “Regulators are rightly going to scrutinize this industry a lot harder, which is probably a good thing, to be honest.”

Alison Morrow contributed to the report.