Last week was off to a rocky start. U.S. stocks fell as revelations of a crypto scandal started to come to light coupled with disappointing US corporate earnings releases. With the uncertainty of the U.S. midterm elections fading, investors turned to last Thursday’s inflation (CPI) report for clues on the path of the Federal Reserve’s future interest rate moves. Higher interest rates mean lower prices for risk assets.
Luckily for investors, the number came in lower than expected- signaling inflation was cooling. This suggested that interest rates might slow in the future- this sent global stock markets roaring upwards with crypto left behind.
Crypto market fallout:
- A week ago the balance sheet of Alameda research, the sister company of FTX, was leaked. Rumors began to swirl as the holdings didn't look sustainable. It seemed that much of its reserves were based on FTT (FTX’s native token). FTX used FTT as a reward currency for trading discounts, and Alameda held far more of the tokens than traded on the market, suggesting its holdings would be hard to liquidate.
- Binance founder and CEO Changpeng Zhao (CZ) announced that they would be offloading their FTT holdings (dating back to an early investment by Binance in FTX). The rumors coupled with this statement arguably caused a bank run on FTX. A few days later withdrawals were paused.
- FTX CEO Sam Bankman-Fried (SBF) informed investors that his company faced a shortfall of up to $8 billion, and needed at least $4 billion to remain solvent, according to Bloomberg at the time. SBF then asked Binance for help with liquidity. Binance being the biggest crypto exchange- in terms of funds, volume and customer numbers. “CZ” stated they would look into acquiring FTX and whiteknighting or bailing out FTX.
- All hell broke loose in the crypto market after Binance THEN walked away from the FTX acquisition deal after discovering an insurmountable financial hole in FTX’s book.
- Shortly after the company announced that SBF had resigned and FTX, Alameda Research, and roughly 130+ affiliated companies had started bankruptcy proceedings.
- As if the collapse of FTX wasn't bad enough, shortly after the exchange filed for bankruptcy, millions of dollars in crypto left FTX wallets in an alleged hack.
FTX was one of the largest crypto exchanges by volume. Major cryptocurrencies tumbled with BTC retracing below $16k, hitting the lowest level in two years, and ETH revisiting July’s 2022 lows.
Why?
It is believed that during May and June, SBFs trading firm, Alameda Research, suffered a series of investment losses. Seeking to prop up Alameda, which held almost $15 billion in assets, SBF transferred at least $4-$10 Billion in FTX funds, a portion of these FTX funds were customer deposits (it is believed).
Who is SBF?
SBF, aka Sam Bankman Fried, the 30-year-old who had set up the Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, accumulating a near $17 billion fortune. FTX – valued in January at $32 billion with investors including SoftBank and BlackRock – has caused chaos in crypto markets with its downfall.
Implications for broader market and why there might be further sell-off:
- Contagion (how many other crypto exchanges have hidden financial holes? Investors are panicky)
- Regulators are going to come down hard on the industry. Retail/customer assets are now lost or stuck on FTX.
- FTX and other firms selling assets for liquidity is causing further downward pressure on crypto prices, from institutions and VC investors in FTX and general margin calls across the industry.
NB:100% non-liquid EasyCrypto client assets are held in custody with the majority in deep cold storage with our regulated and insured custodian BitGo and are audited annually.
We do not trade or lend client assets. They are segregated and held in the name of the client in a bankruptcy remote vehicle namely First World Trader Nominees.