FTX collapse and the state of cryptos

  (photo credit: INGIMAGE)
(photo credit: INGIMAGE)

The crypto world had hardly recovered from the Terra LUNA implosion when the FTX collapse rocked the already brittle market conditions. Once the second largest crypto exchange in the world, FTX folded up within a few days of its financial troubles being made public.

FTX’s demise had a massive impact on the cryptocurrency market. Bitcoin, the King of cryptocurrencies, fell as low as $15,600. While the exchange was once valued at $32 billion, it is nothing but dust. The crypto market felt the heat hard, with the market value bleeding out roughly $183 billion.

But What Really Happened?

Before we go into exploring the impact that FTX’s implosion has in the crypto market and future implications, we must first understand what and how the FTX collapse happened.

The story revolves around Alameda Research and FTT, the native FTX token. FTX is the brainchild of Sam Bankman-Fried (also known as SBF). Alameda Research is one of more than 130 different companies owned by SBF. The companies are independent on paper, but this is where things start to go wrong.

Coindesk, one of the leading crypto news platforms, published a news claiming leaked documents that said Alameda Research’s assets were mostly composed of FTT. In short, the company’s value was built on hot air as FTX would simply mint its own tokens (which itself had little use outside the exchange) and lend it to Alameda.

Binance, led by its CEO CZ, decided to sell its FTT holdings (to the tune of $580 million) following this knowledge. That set off a market scare and FTX users decided to either liquidate their assets or withdraw too.

This is where the web of mismanagement starts to get really complex. FTX did not have access to wire transfers, so would redirect its users to Alameda and then credit the users’ FTX accounts. In reality, the funds were never deposited in FTX and Alameda used the funds and borrowed FTT to make risky investments. Over the years, this amounted to $8 billion customer funds.

CZ did try to attempt to save FTX users by entering a non-binding agreement to buy out FTX, but withdrew when a glance at the books revealed a hole Binance could never plug.

The scare caused by Binance’s move to remove FTT from their portfolio and its decision not to help FTX led to a massive liquidity crunch. Customers wanted their funds and assets back. Stuff that Alameda Research had already gambled away.

Collapsed Cryptos

The result is a market that is scared. Bitcoin price, though now at a better level of $17,000+, might not recover to its former glory anytime soon. The prices of other major cryptocurrencies, such as Ethereum, Ripple and Cardano, have also been under pressure for some time.

It is not just FTX, but the market sentiment changing towards centralized exchanges. These entities, though crypto exchanges and dealing in blockchain assets, don’t use the blockchain network to execute trades. This means that all customer see are numbers on their screen and have no idea if their assets are actually in their exchange account or not.

With the trust broken, people are still liquidating or withdrawing their assets from exchanges all over the world. Binance, which has claimed to take all necessary steps to ensure user funds’ safety, is still experiencing a massive withdrawal. As much as $3.6 billion moved out in the second week of December only.

This is also true for other exchanges, including US based Coinbase and EU’s Bitvavo. However, like all major quality exchanges, all of these are fulfilling their customers’ request, showing that at least these are not built as a house of cards as FTX was.

CeFi Scare, DeFi Dominance

With a major player like FTX playing irresponsibility with customer funds, the trust in centralized exchanges (CEXs) is at an all-time low. The public is using three different options from here.

Users are either liquidating their crypto assets and withdrawing fiat or simply moving their cryptocurrencies to private wallets.

For people who still wish to have access to crypto trading, they are simply using their private wallets and connecting to Decentralized Exchanges (DEXs), enabling them to continue their activities.

The result? There is a drop in global CEX holdings and their trading volume continues to fall. On the other hand, DEXs witnessed a massive rise in activates.

What’s in the Future for Crypto Prices?

Like any other exchange imploding in the past (remember Mt. GOX?), the point to understand is that the markets fall, but cryptos survive. The technology behind the digital tokens and coins has proven for more than a decade to be sound, economical and (most importantly), gives users control over their finances.

The latest market shakeup will pass too and over time, crypto prices will recover. However, considering that Bankman-Fried was actively lobbying for regulatory intervention in the crypto industry, especially when it comes to trading and investing, the domino effect of FTX’s collapse has activated countries across the globe to push forward to develop a framework that incorporates the digital assets.

While this will give legal protection and coverage to exchange users, as more oversight will prevent mismanagement and any fraudulent activities, the long arms of law will extend much further. Of the many characteristics of DeFi, the decentralization means that there is not a single entity in control, but more of a community effort.

How will future regulations shape the industry ecosystem for DeFi platforms to operate (if at all) and maintain their independence from governments and agencies is something to think about.

DeFi and CeFi go hand in hand. DeFi gives the autonomy that Nakamoto envisioned as the future of finance. Yet CeFi gives users the ease of investing and trading, simplifying a lot of operations that DeFi requires a user to do by themselves, including on and off ramping with fiat.

A heavy-handed approach by authorities will give crypto users confidence, helping push up crypto value and prices. But if this starts stifling DeFi related activities (though these will continue to operate as blockchain is censorship resistant), it might have a negative impact.

Whatever the case may be, the coming months are going to be very interesting for industry and the crypto prices.

This article was written in cooperation with AdsEffect