Why is the crypto market in turmoil again?
Cryptocurrency is in crisis – again. In the space of three days, roughly $200 billion has been wiped off the market, as the world’s third-largest exchange by trading volume risks a complete collapse.
Bitcoin alone is down more than 75 percent from the all-time high it saw just one year ago, having fallen to its lowest price since late 2020. But this is nothing compared to the losses seen by FTT, the original cryptocurrency for the coated FTX exchange.
The crypto token, which was ranked among the top 20 cryptocurrencies globally as recently as last week, has dropped almost 90 percent in just four days, seeing the fortunes of FTX.
So what caused this crisis, is it over yet, and where will the crypto market go from here?
After one of the longest periods of stability in cryptocurrency history, cracks began to appear last weekend when the head of the world’s largest crypto exchange announced that the company would be selling its entire holdings of FTT.
Binance CEO Changpeng Zhao, known as CZ, cited “recent revelations that have come to light” for liquidating FTT worth hundreds of millions of dollars. It followed a report in CoinDesk that questioned the relationship between FTX and trading firm Almeda, both of which were founded by Sam Bankman-Fried.
The crypto publication claimed that a “private financial document” revealed that 40 percent of Almeda’s $14.6 billion balance sheet consisted of FTT holdings, meaning the trading giant “rests on a foundation that is largely made up of a coin that a sister company found up”, rather than an independent asset such as bitcoin or the US dollar.
Concerns about the financial health of FTX led to withdrawals of billions of dollars in cryptocurrency in just a few days, causing the entire crypto market to crash as well as creating a liquidity crisis for FTX.
Mr Bankman-Fried sought help from investors before approaching CZ, which agreed to a non-binding agreement to take over the bailout. However, within 24 hours he pulled out, causing the market to fall further.
In a statement posted on Twitter, Binance wrote: “Initially, our hope was to be able to support FTX’s customers in providing liquidity, but the issues are beyond our control or ability to help.”
The future of FTX remains uncertain, with Mr Bankman-Fried attempting to explain the company’s position at length Twitter thread on Thursday.
“Sorry. That’s the biggest thing,” he wrote. “I caught myself and should have done better.
“Right now, my first priority – by far – is to get it right for the users. And I will do everything I can to do that… We spend the week doing everything we can to raise liquidity. I can’t promise anything about that. But I will try.”
The scale of the resulting downturn is so severe, some analysts warn, that it risks destabilizing the broader economy.
“Crypto losses so far from institutional participants in retail and digital assets have largely been contained within the cryptosphere, a credit positive for banks and evidence of banks’ rather cautious approach to crypto in light of the uncertain regulatory environment,” said Fadi Massih, a vice president in Moody’s Investors Service.
“However, should leverage again build significantly into the crypto-finance system, it could confuse the banking system, even as banks continue to distance themselves from direct interaction with the crypto-economy.”
