FTX Bankruptcy, Chaos continues

What a mess last week in the crypto market. And the muted price action we've seen in digital assets over the past few weeks has proven to be the calm before the storm. The skirmishes that started between the two crypto trading giants eventually resulted in the complete destruction of one of them. I covered the plot of this story in another viral event that will hit the Cryptoverse this year. 


2022 begins as crypto enters a bear market. The movement was boosted by the collapse of the multi-billion dollar stablecoin project Terra/Luna in May. And just as things started to pick up as stocks entered the holiday season, we were faced with another large-scale crisis. Things are going quite smoothly and unstable in the crypto market, everything turned upside down a week ago. 


Let's look at the big picture. As of May 2022, 38 companies in the crypto industry have laid off employees, among them crypto exchanges BitMEX and Coinbase, crypto service providers Crypto.com and Blockchain.com as well as the OpenSea NFT marketplace. Today, 130 companies of the FTX Group that own the FTX cryptocurrency exchange have officially filed for bankruptcy due to a liquidity crisis. Binance, the world's largest exchange, abandoned a plan within 24 hours to buy rival FTX - leaving the exchange on the brink of collapse. And indeed he did. 


FTX and several of its subsidiaries, facing a shortfall of up to $8 billion due to a severe liquidity crunch, filed for bankruptcy last Friday - revealing more than 100,000 creditors and tens of billions of dollars in assets and liabilities. As if that wasn't enough, FTX is currently investigating a possible hack and moved all of its digital assets offline over the weekend. According to estimates from cryptocurrency company Elliptic, the stolen assets could be worth more than $477 million. 


Worrying details emerged shortly before the bankruptcy filing that FTX Trading International only held $900 million in liquid assets compared to $9 billion in liabilities. Many cryptocurrencies remained under pressure over the weekend as these details leaked. However, major cryptocurrencies recovered after Binance CEO Changpeng Zhao said the world's largest digital asset exchange plans to establish an industry recovery fund. No one can predict how long this feeling will last. 


The fallout from the FTX story is quite severe as it led to a wide-ranging drop in the prices of major cryptocurrencies, wiping out more than a tenth of the value of the global crypto market. According to the data collected by Chainalysis, we can see how traders/investors find the safety of stablecoins after the event. There are two ways to do this: trade pegged stablecoins with fiat currencies like US dollars, or liquidate it outright and swap the crypto for fiat currency. 


Most often is the case in the past, when users tend to temporarily seek safety and stability before things settle down, and they return to cryptocurrencies. The move to fiat currency represents a more permanent move, fearing that all will be lost. As you can see in the chart above (Figure 1), stablecoin trading volumes surged as FTX's situation continued to deteriorate, surpassing their two-week high. The data shows that many investors actually turned to stablecoins when the market was volatile. 


But what about the extreme panic investors who trade in fiat because they fear the worst? For this we need to look at the second chart. The situation here is similar to that of stablecoins, although the uptrend is less pronounced. The steady rise in crypto trading against USD started on November 7, followed by significant spikes on November 8 and remained high until the end of November 10. Since then, they have returned closer to normal. The big picture - many investors have rearranged their positions, only temporarily. 


If Binance is not yet the dominant player in the crypto exchange scene, this event further cements its market leadership position. According to data compiled by analysts at The Block (Figure 3), not even an exchange has achieved close to Binance's trading volume, with trades amounting to $4.6 trillion. from January to November 11. FTX is fourth behind Coinbase and OKX. Though some have suggested that it was Binance who caused the demise of FTX by liquidating its huge holdings of FTT (FTX's native token). 


From a broader perspective, the crypto universe is still a much smaller space than the old financial markets and such an event would create shock waves throughout the entire ecosystem. . Skeptics still believe that cryptocurrencies still occupy a niche on the sidelines and are at best still a highly speculative asset class – prone to such catastrophic failures. We've heard that this story is also being reinforced by global financial regulators, but here it is – they haven't done anything to fix the problem.


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