The world’s second-largest cryptocurrency exchange, FTX, might be acquired by the world’s largest, Binance. Why? The answer is the liquidity crunch.
The current trajectory of the crypto crash has a lot of parallels with the housing bubble of 2008. Bank runs to Lehman Brothers led to insolvency, and now there’s reminiscence with a bank-run situation with FTX this year.
History does repeat itself, and just 14 years later. The important question now is: Why and how?
2022 was already a miserable year for cryptocurrencies in general. It was assumed that this year would be the year when the crypto landscape would transform for the better. But, regrettably, this was not the case.
While we're still reeling from the catastrophic crypto meltdown, we can't help but wonder about the following; is 2022 the end of crypto? Or is there light at the end of the tunnel where we finally do move past this crash?
We did see signs of recovery in the last 2 months when Ethereum was above 1500 and BTC was in 20,000s, all of this until last week when CoinDesk exposed FTX’s financial health.
This kicked-off a major sell-off as investors started withdrawing their money from the platform, and the candles flashed red. A concurrent announcement came from Binance, the competitor, which said it would sell off all of its massive $500 million worth of FTT holdings- FTT is FTX’s native token.
The sum of these causes caused FTT to collapse. By midday on November 8, the token had fallen from $22.79 (early November 7) to about $15.04. The market as a whole suffered from FTT's falling valuation, which caused most tokens to trade at a loss.
Soon after, Binance revealed its intention to buy FTX, and things started to go south. FTT plunged from $19.01 late on November 8 to $3.59 early on November 9 due to the announcement.
Fortunately, the announcement of the Binance acquisition soon calmed investor jitters as FTT began to show signs of recovery, rising to the $5 level a few hours later.
But in an unexpected change of events, Binance pulled out of the agreement, and FTT plunged to new lows. At $2.25, it is presently 90 percent cheaper than it was at the same point last week.
Does this situation ring some bells? The Terra breakdown also sent the markets plunging at the time, and the FTX disaster is frighteningly similar. Similar circumstances exist right now, with the majority of the top 100 coins flashing red and some with double-digit losses.
The Domino Effect
While the FTX meltdown impacts the whole cryptocurrency market and creates a domino effect, specific projects are doing worse than others.
For example, Solana, sometimes referred to as the Ethereum killer, has suffered losses of 32% over the past day, second only to FTT. It may be because Sam Bankman-Fried (SBF), the founder of FTX, invested and vouched for Solana early on that the currency has been in free falling over the past couple of days.
As a result, most cryptocurrencies exposed to SBF's firms have been severely impacted. Since November 6, Sam-backed tokens, including Bonfida (FIDA), Raydium (RAY), and Maps (MAPS), have declined by an average of 40%.
The FTX drop also hurts the two biggest cryptocurrencies by market capitalization, Bitcoin and Ethereum. After briefly approaching $15,711 this morning, Bitcoin set a new low for the year.
The situation is similar for Ethereum, which has fallen by roughly 10% in the past day and is down by about 24% for the week.
The domino effect was bound to be more predominant, especially after the market leaders BTC and ETH showed signs of dipping.
What’s Next for Crypto?
Is the crash here to stay?
The FTX disaster is a brand new occurrence, and there appears to be a difficult path ahead. The crypto market will continue to be plagued by uncertainty as long as FTX's future is still uncertain. It suggests the fears will linger and that it will take some time for investor momentum to return to where it was.
However, history has proven that markets bounce back even though the public sentiments are less than ideal. Once that confidence is back, there’s no stopping from there.
As Google and big tech companies start adopting crypto as a currency in 2023, it is anticipated that more financial institutions will begin to accept cryptocurrency as payment.
Furthermore, according to a research paper released on Thursday by JPMorgan (JPM), the underlying technology stablecoins, a class of cryptocurrency whose value is tied to another asset like the U.S. dollar or gold, will continue to be crucial to the development of the monetary system.
The study said that the technologies, including tokenization of assets and securities, smart contracts, and encryption, will "change the future of financial institutions."
For investors, what they should do is the most critical question. Most experts would advise remaining composed and moving forward.
Withdrawing money from online wallets and storing it offline in cold wallets is another wise move. If FTX declares bankruptcy, it may cause several other bankruptcies. As evidenced by the Voyager and Celsius court cases, recovering funds from crypto companies facing bankruptcy procedures can be a time-consuming and challenging process. Doing your due diligence and securing your assets at this point is crucial as a crypto investor.
We've seen the crypto market experience peaks and valleys before. There have been many times when cryptocurrencies have been written off or declared dead only for us to see them bounce back stronger than ever. It's not a question of if the crypto industry rebounds but when. The most important question you should be asking is: how will you be positioned when the rebound occurs?
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