Bitcoin (BTC), the world’s dominant digital currency, is hovering near a two-year low after the collapse of crypto exchange FTX deepened a crisis of confidence in the nearly trillion-dollar crypto industry.
Bitcoin, and Ethereum (ETH), the second largest cryptocurrency by market capitalization, both fell more than 20% in the last seven days as the FTX saga unfolded, sending shockwaves across the crypto sector.
Bitcoin traded at USD 16,900 on Tuesday, 15 November at 9 a.m. in London, up 0.8% on the previous day, but not far from the two-year low of USD 15,560 reached last week. The digital currency set a record high of USD 69,000 just a year ago. Ethereum rose 1.5% to USD 1,274 on Tuesday. It dropped to its lowest level since July last week.
Bitcoin’s year-to-date performance
FTX, one of the world’s largest cryptocurrency exchanges, unravelled in less than a week amid a liquidity crunch as it failed to keep up with a wave of withdrawals by its clients. A takeover approach by rival Binance also fell through. FTX, an associated hedge fund Alameda Research, and 130 affiliated companies belonging to FTX Group filed for bankruptcy protection on Friday, 11 November, in Delaware, according to a company statement posted on Twitter.
Following seeking bankruptcy protection, FTX also announced that 30-year-old billionaire Sam Bankman-Fried, is stepping down from his job as FTX’s chief executive, to be replaced by John J. Ray III.
“The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximize recoveries for stakeholders,” Ray said in the statement.
Bitcoin is down 64% this year as investors and traders weigh the relevance digital currencies amid concern about the lack of regulation in the digital asset universe. The global crypto market cap is USD 834.31 billion after about USD 200 billion have been wiped out of crypto assets in the past week, according to Coinmarketcap.com data.
What is weighing on Bitcoin is the sentiment surrounding crypto assets in the wake of the FTX debacle, according to Carl Capolingua, a Melbourne-based market analyst at ThinkMarkets.
“The problem is that the uncertainty surrounding the broader crypto industry's exposure to FTX may cause a number of institutional investors to back away from the sector,’’ Capolingua said. “It's hard to see an environment in the short term where Bitcoin can flourish.”
Even so, Bitcoin has the potential to recover in the longer term due to its attributes, according to the analyst.
“Bitcoin is still bitcoin,” he said. “The math behind it, its infallibility, its utility as a form of payment and its attractiveness as a store of value. None of those things depend on FTX's survival or demise.”
Events around FTX sparked speculation on which crypto market participants or platforms may be next in line to fall and triggered renewed calls from politicians and regulators for increased oversight of the digital marketplace.
“Crypto finance, because it is no different than traditional finance in the risks that it exposes, needs to be under the regulatory perimeter,” Federal Reserve Vice Chair Lael Brainard told Bloomberg in an interview.
The run on FTX began when CoinDesk, a crypto news service, published findings on 2nd November that a large part of the USD 14.6 billion of assets on the balance sheet at Alameda Research, founded by Bankman-Fried, were linked to FTX’s own exchange token, FTT.
Following the report, Changpeng Zhao (known as CZ), the chief executive of Binance, said on Twitter that “due to recent revelations,” Binance will “liquidate any remaining FTT” it held, pushing the value of FTT tokens into freefall.
Binance played a further role in FTX’s downfall after pulling the plug on a mooted rescue deal. CZ cited “due diligence” carried out by Binance on FTX and “news reports regarding mishandled customer funds,” as the reasons for walking away from a takeover in a Tweet.
To pre-empt a run by customers like the one that brought down FTX, Crypto exchanges are rushing to reassure investors that their holdings of digital assets are safe.
Kris Marszalek, chief executive of Singapore-based crypto exchange Crypto.com, refuted suggestions made on social media that it may be in trouble. In a Q&A session on YouTube he said the exchange had a “tremendously strong balance sheet”.
Binance’s CZ revealed on Monday in a Tweet that his company was setting up an “industry wide recovery fund” to prevent a liquidity crisis emerging at cryptocurrency exchanges and other companies linked to crypto assets that are “otherwise strong.”
The initiative aims to “reduce further cascading negative effects of FTX”, CZ said. He added “crypto is not going away... Let’s rebuild.”
Is crypto here to stay and are we going to ever revisit the lofty heights of the record cryptocurrency valuations reached post-pandemic, or is the crypto industry’s fate sealed by the fallout form FTX?
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