FTX debacle sparks investor rethink of battered crypto market

NEW YORK/LONDON – With major cryptocurrency exchange FTX on the brink of collapse, some investors are beginning to question the viability of a sector already bruised by the bitcoin bubble bursting and closures of key market players.

Crypto markets have come under intense pressure this year, as rising interest rates prompt investors to ditch risky or speculative assets.

The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and hedge fund Three Arrows Capital, had rung alarm bells even before the fiasco at FTX, headed by Sam Bankman-Fried.

He was racing on Thursday (Nov 10) to find finance to prop up his embattled crypto exchange, according to a Slack message to FTX staff seen by Reuters, after rival Binance scrapped a proposed bailout following a review of the company's structure and books.

A spokesperson for FTX did not comment on the Slack message. Bankman-Fried later said in a series of tweets that FTX was seeking to raise liquidity.

FTX is scrambling to raise about US$9.4 billion (S$13 billion) from investors and rivals, a source said on Thursday.

Some in the industry say this fundraising challenge could be beyond Bankman-Fried's reach, however, as concerns over patchy oversight and counterparty risk begin to overwhelm likely returns from the asset class, at least in the near-to-medium term.

"From a financial side, it's fair to say that confidence is going to be somewhat shaken because if you can't trust FTX then what can you trust?" Yat Siu, co-founder of Hong Kong-based investor Animoca Brands, told Reuters on Wednesday.

FTX's swift fall from grace followed heavy speculation about its financial health that triggered US$6 billion of withdrawals in just 72 hours earlier this week. The company had published a valuation of US$32 billion as recently as January.

"What makes this new phase of deleveraging more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem," analysts at JP Morgan said in a note to clients.

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"Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue."

Speaking at the Token2049 crypto conference in London on Wednesday, Andrei Kazantsev, global head of crypto trading at Goldman Sachs, said "counterparty risk is starting to be top of mind" for some clients once drawn to crypto trading by high volatility and yield.

Unlike traditional corporations and financial firms, crypto entities operate in a regulatory grey area. For instance, deposits at crypto lenders are not insured by the government.

In the case of FTX, US residents cannot trade on its global platform due to strict regulations for the crypto space in the United States. FTX has a US partner, FTX.US, but its offerings are more limited than the global platform.

Ken Lo, co-founder at Hong Kong-based crypto exchange and custodian Hong Kong Digital Asset Exchange, said counterparty risk, which comes from a lack of transparency and information disclosure, underscores the need for "clear regulatory framework and vision statement."

'Poster child' no more

It was only a few months ago that Bankman-Fried, 30, had been seen as a crypto white knight, salvaging beleaguered crypto firms that faltered as prices cratered.

"The show must go on, the industry needs to keep growing, but it's definitely a step-back in itself when you see the poster child of the industry being put in this position," said Jean-Marie Mognetti, chief executive of crypto asset manager CoinShares.

"It is a lesson which seems to keep repeating itself," he added, citing certain star traders in various companies that ended up in trouble.

While the meltdown would not stop companies from creating new blockchain-based products, Animoca's Siu said it "probably will create a little bit of a chill effect" for institutional investors entering crypto markets.

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To be sure, some investors continued to have faith in the sector and bitcoin, the world's largest cryptocurrency, rebounded 12.5 per cent to US$17,853.

In an interview with CNBC on Thursday, Microstrategy Chairman Michael Saylor said he will continue to acquire bitcoin when the opportunity presents itself.

On Wednesday ARK Invest, led by high-profile crypto proponent Cathie Wood, bought shares in FTX rival exchange Coinbase Global.

FTX's snowballing troubles rocked digital currencies on Wednesday.

Bitcoin hit a two-year low of US$15,632, down about 77 per cent from an all-time peak of US$69,000 from November 2021. Ether, the second-largest, hit its lowest level since July before steadying on Thursday.

FTT, the smaller token tied to FTX, plunged. Its market cap dropped to around $360 million, down from around US$3 billion at the start of the week, according to CoinGecko data.

Max Boonen, co-founder of digital asset liquidity provider B2C2, said FTX's problems have set the crypto space back by six months.

Speaking at the Token2049 crypto conference in London, he suggested that investors will to have to rely more on credit asset managers doing due diligence on private financials.