The past four days have been a crazy time for crypto. Bitcoin is down almost 24% from Monday, triggered by massive upheaval in the markets after crypto exchange FTX’s native token, FTT sank over 90% in an event echoing the spectacular failure of Luna in May. The problems began earlier last week when a report showed that FTX’s sister company and trading firm Alameda Research had roughly half of its holdings – billions of dollars – in FTT. This prompted questions about the financial situation of Alameda, leading crypto giant Binance to announce that it would sell its entire FTT holdings – over US$500 million worth at the time of the announcement on 6 November.
This, in turn, prompted a wave of withdrawals, forcing FTX to freeze the platform and drawing speculation that the company was trading with client funds – a breach in its terms of service. Binance then stated that it would bail the company out, before backing out of the deal a day later, citing “mishandled customer funds and alleged U.S. agency investigations” that were beyond their control.
All this spells trouble for the crypto market. FTX is by no means small, and at one point was only second to Binance in terms of market capitalisation with $32 billion. Its founder, Sam Bankman-Fried, is extremely high profile, having built a reputation for saving other crypto firms and being the second-largest donor (a move that obviously comes with some amount of lobbying for the crypto industry) in Joe Biden’s presidential campaign.
Contagion fears are now plaguing the wider crypto markets, especially since Bankman-Fried was a large liquidity player during Terra’s $60 billion meltdown earlier this year. As an industry with little regulation and no circuit breakers, the continued selloff of cryptocurrencies runs the risk of triggering capitulation sell stops as investors try to cut losses. According to CoinGecko, the entire global crypto market lost over 10% in the past day after a few months of relative stability.
For comparison, Terra’s collapse contributed to the price of BTC almost halving between May and mid-June.
Risk management (for example, not holding a large portion of assets in a self-created, volatile token; or trading with client funds) is now on every crypto player’s lips, with exchanges including Binance, Gate.io, and KuCoin issuing statements that they would publish their fund reserves to increase transparency – and calm investors.
Movements in cryptocurrencies will be extremely volatile in the coming days, and traders are advised to be extra vigilant about risk management. Keep an eye out for the results of the ongoing US midterm elections – which will give hints for the future direction of crypto legislation. While macro data will most likely be overshadowed by urgent developments in the cryptocurrency industry, investors are advised to keep an eye out for the US CPI figures, which will be released at 15:30 (GMT+2) on 10 November.
As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.