FTX Crush: Consequences
The events of recent weeks related to the collapse of a major player in the crypto industry have caused significant market upheaval. While retail users have been identified and are considerable, institutional customers of FTX may be more affected by the market’s problems.
It should also be noted that FTX’s bankruptcy is seen in the context of the financial failure of venture capital firm Alameda Research, whose participation in crypto start-ups is among the highest in terms of numbers and investments.
In order to assess the consequences, it makes sense to look at the overall market picture and then take the details into account. The situation in the derivatives market, for example, is quite clear:
Futures trading volume fell significantly after a surge at the time of major news on the cancellation of a possible FTX takeover by Binance. From highs of $100 billion and $84 billion to around $25 billion for both cryptocurrencies, the decline was around 75%! On the other hand, relative to pre-event averages, the decline was around 40%.
What is even clearer is the decline in open interest for futures (including futures and open-ended contracts). From the usual figures of 12 billion and 10 billion for Bitcoin and Ether respectively, figures have fallen to 6 billion and 4 billion — minus 50% from the beginning of the month.
The FTX drop has had an impact on market activity — through a reduction in actual trading volume due to the exclusion of liquidity and the exchange engine and through a loss of trust between large market participants.
After it became clear that FTX still had liquidity problems, and they were quite large, all the centralised exchanges faced a massive withdrawal of cryptocurrencies from their balance sheets. A total of around 120 000 BTC and 2 700 000 ETH were withdrawn during the week. At the moment, this liquidity is in the wallets of users who have either taken a wait-and-see attitude or become more active in using decentralised exchange and trading solutions.
The surge in revenue generated by the major DeFi protocols -Uniswap, Curve, Compound, AAVE, etc., indicates both an influx of users and liquidity. Given the active bear market, the decline of one of the centralised trading spikes has certainly supported the WEB3.0 sector in the crypto market. However, the extent to which the trend of DeFI use will be sustainable will be clear in the future, for now it is too early to discuss the long-term effect.
The FTX case took not only ordinary users and traders by surprise but also big market makers within the options market.
The surge in volatility from November 7th to 11th began with Twitter reports of a possible FTX acquisition by Binance and peaked after the deal was abandoned and a bankruptcy filing was made. Most of the activity was centred around put options with strikes of 15 000 -16 000 for Bitcoin (1000 and 1100 for Ether).
Although the market has stabilised, liquidity has still not fully returned. Options on the Solana token (SOL) are only available for existing strikes — there will be no new ones. In fact, since the new year, the market of options on SOL will be closed or at least paused. This situation indicates a lack of market makers and/or an unwillingness to organise further trading of the token.
In addition to the write-down of FTX product investment itself (already announced by Tomasek, Sequoia, Ontario teachers pension board), many large companies working with institutional traders or using cross platform solutions for crypto trading have faced the inability to recover working capital. The most notable examples are Genesis Trading, MultiCoin Capital, Asian derivatives exchange AAH.
The most challenging situation has arisen around cryptocurrency holding company DCG, whose Genesis trading arm has 2.8 billion in “complex debts” to collect. The company incurred such “complex” debts as a result of the bankruptcy of 3 Arrow Capital last summer and now FTX. The consequences of the largest borrowers going bankrupt are extremely serious and could potentially spill over to crypto industry flagship Grayscale Trust (also part of DCG holding), which has 655 000 BTC and 3 million ETH on its balance sheet. Using the trust’s shares as collateral in an initial or crypto loan, along with a discount to market value, creates the problem of accounting for this asset on the balance sheet. In theory, 1000 GreyScale trust shares equals 1 Bitcoin on the balance sheet, but now the market has a very large discount of around 50% to the share value, and the actual value is different from the balance sheet value. Because of this, the securities have become liquid collateral for a number of Genesis Trading deals, leaving the company in need of a $500 million recapitalisation.
The FTX collapse has caused many casualties — retail investors and traders, investment companies and venture capital funds. Only the Binance exchange looks relatively settled, having published the addresses of its wallets with over $50 billion in reserves and therefore resisting the wave of panic and deposit withdrawals. Coinbase, whose main competitor in the US market went bankrupt, and the DeFI ecosystem, including deltatheta, got an opportunity to attract experienced crypto users who have learned the most important lesson in the crypto finance market: “Not your keys, not your money”.
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