Fear of contagion sweeps the crypto sector after FTX liquidity crisis

Fears of contagion sweep the crypto industry as market participants race to find out who is exposed to Sam Bankman-Fried’s secretive digital asset trading company Alameda Research.

Alameda, a proprietary trader, has been a low-profile part of the founder’s crypto empire, but is at the center of the storm that has engulfed his crypto exchange FTX.

Market turmoil over Alameda’s financial health accelerated, sparking a wave of withdrawals from customers at FTX, pushing Bankman-Fried to seek rescue from larger rival Binance.

As the impact of the shock deal set in, traders worried that the collapse of Alameda, one of the biggest traders on the FTX, could reverberate through the markets at a rapid pace.

“[Alameda] will scramble to liquidate assets on its books to meet any debt obligations, of which there are many. In addition to the loans to FTX, Alameda is also an active participant in decentralized finance, said Sean Farrell, head of digital asset strategy at Fundstrat, a market research provider. “There is sufficient reason to believe that the risk of further infection remains.”

Binance has declined to say whether the takeover plans for FTX include the trading firm. A rescue package can help to insulate the digital asset industry and the exchange’s customers from further fallout, but will increase the risk of the transaction.

Crypto traders have widely assumed that Binance will leave Alameda to fend for itself, and that the liquidation of their positions will inflict further pain on the digital asset market that is already on its way following the near collapse of FTX and the two-thirds drop in asset values ​​this year.

“Crypto players react more quickly to news and rumours, which in turn builds up a liquidity crisis much faster than one would have seen in traditional finance,” said Fabian Astic, head of decentralized finance and digital assets, at Moody’s, the rating agency.

Bitcoin, the largest cryptocurrency, fell 5.4 percent to $17,700, near a two-year low on Wednesday, while ethereum fell 9.2 percent. Overnight shares in Coinbase, the crypto exchange, fell 10.8 percent.

Galaxy Digital, US billionaire Mike Novogratz’s crypto-finance group, said on Wednesday it had exposure of nearly $77 million in cash and digital assets to FTX, of which $47.5 million was withdrawn.

Others have rushed to reassure the market that they are not exposed to the exchange or FTT, the internal currency for trading on FTX. Brian Armstrong, CEO of Coinbase, said his company has “no material exposure to FTX or FTT (and no exposure to Alameda).”

Most at risk will be companies lending assets to Alameda and crypto projects in which the trading company has invested heavily, stakes it may now be forced to sell to balance its books.

The firm was a major backer of Solana, a rival blockchain to Bitcoin, which lost as much as 50 percent of its value against the dollar overnight on Wednesday, before paring losses in volatile trading.

“I don’t see a situation there [Alameda] will come back from this. . . I think they were betting a lot on the value of that FTT token,” said a person familiar with the matter. “Alameda should have been able to fix this if they actually had what they said they had, and this is a clear signal that they don’t.”

Jon de Wet, chief investment officer at crypto asset manager Zerocap, which has traded with Alameda in the past, said that until recently Alameda was seen as a solid counterparty for lenders and hedge funds across the crypto sector.

“Alameda was a respected firm,” he said. “I think there would be a lot of firms that would be exposed to Alameda.”

Founded in 2017 by Bankman-Fried to pursue arbitrage opportunities across different countries and exchanges in the nascent crypto-asset market, the trading firm has since expanded its activities.

“Alameda came before FTX. It would take its balance sheet and it would provide liquidity on exchanges and earn a spread. It would also require directional bets like prop trading,” de Wet said.

The extent of the pain will depend on whether Binance also stops Alameda. Late on Tuesday, a spokesperson for FTX told the Financial Times that “Alameda is included in the deal”.

Binance declined repeated requests to clarify its position. Its silence is likely to reinforce the views of those in the market who assume the trading firm will be allowed to fail.