FTX Crypto Platform Collapse Compared to 2008 US Crisis; understand

The staggering fall of the FTX exchange, one of the biggest and most reputable players in the digital asset market, is raising alarm among people who own cryptocurrencies as investors run for cover.

There are still many unanswered questions. But two big ones arise: how far will the damage spread? And can the cryptocurrency industry recover?

Industry experts are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” referring to the investment bank’s 2008 meltdown that sent shockwaves through Worldwide. Many find it an adequate comparison.

What is clear is that the fallout from the FTX crisis injects significant volatility into the cryptocurrency ecosystem.

The episode destroyed confidence and emboldened regulators, who are now on high alert.

“This was one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jog, co-founder of California-based blockchain startup Sei Labs.

From the best in class to the limit

“Storm.” “Insane.” “Chaos.”

These are terms cryptocurrency investors and pundits have used to describe the failure of FTX, launched in 2019 by Sam Bankman-Fried, a 30-year-old prodigy who was once hailed as a modern day JP Morgan.

The company was valued at $32 billion in its latest funding round and has recruited high-profile financiers including SoftBank, Tiger Global, Singapore’s Temasek, as well as celebrities such as Tom Brady, Gisele Bündchen and Naomi Osaka. His name is on the arena where the Miami Heat play.

This week, investor Sequoia Capital said it has reduced the value of its stake in FTX to $0.

The exchange — which is said to be selling for between $8 billion and $10 billion — has failed to meet customer withdrawal demands. Bankman-Fried resigned on Friday and FTX filed for bankruptcy protection in the United States after a bailout of rival Binance failed.

“Everyone is a little bit in shock,” said Shan Jun Fok, co-founder of Moonvault Partners, a Hong Kong-based cryptocurrency investment firm. “Many people trusted FTX as the gold standard.”

He compared the FTX collapse to that of Enron, the 2001 corporate fraud scandal that resulted in the surprise bankruptcy of the US energy company.

The situation is still developing rapidly. But one concern is how this could spill over into the entire cryptocurrency industry, which was worth over $1 trillion in August.

Over the summer, as digital assets plummeted in value, Bankman-Fried invested about $1 billion to rescue companies and strengthen assets to try to keep the entire industry afloat. Now, there are few white knights left to rescue FTX and others in distress.

“The number of entities with stronger balance sheets able to rescue those with low capital and high leverage is decreasing within the cryptocurrency ecosystem,” JPMorgan strategists said in a note to clients this week.

The end of FTX could produce other casualties. It is difficult to know at this point who is exposed, although there are clear ripple effects.

The prices of bitcoin and ether, the two most held cryptocurrencies, are more than 20% lower last week. The price of Solana digital currency was also hit thanks to reports that Bankman-Fried’s trading company Alameda Research had sizable holdings.

Stablecoin Tether, which was supposed to be a safe place to keep money, recently broke its one-to-one peg to the US dollar. And cryptocurrency lending platform BlockFi said on Thursday that it was pausing customer withdrawals.

Traditional investors have also been burned, though they are assuring clients they can handle the fallout.

The Ontario Teachers’ Pension Plan said that despite the uncertainty, losses linked to its $95 million investment would have a “limited impact” as the stake represents less than 0.05% of total assets.

Changpeng Zhao, CEO of Binance, tweeted that he was texting Nayib Bukele, president of El Salvador, who went all-in on bitcoin. “We don’t have any Bitcoin on FTX and we’ve never had any business with them,” Zhao de Bukele said. “Thank God!”

Can the cryptocurrency industry survive?

Analysts note that many risky activities have already been eliminated from the system after a tumultuous few months.

But as frightened investors withdraw funds from the cryptocurrency, more pain may follow. JPMorgan believes bitcoin could drop to $13,000, down nearly 22% from where it is now. Fok said the digital currency could dip below $10,000, a low it hasn’t reached since 2020.

In this climate, the “crypto winter” is about to get even worse, especially as fears about the broader economic landscape continue to erode appetite for risky assets.

“In the short term, this is going to be really, really bad for the cryptocurrency industry,” said Sei Labs’ Jog. But he doesn’t think this will “end things” completely and hopes that it could increase interest in his business, which focuses on building more transparent and decentralized cryptocurrency exchanges.

Fok said he expects the FTX collapse to drive institutional investors away from the crypto space, just as they were warming up to it. While some people continue to work on interesting projects, it can take years to restore faith in the industry’s promise.

It is also almost certain to encourage regulators to tighten the screws, increasing costs for cryptocurrency companies that survive the unfolding purge.

“This reinforces the view that any type of financial company needs extensive regulation,” said James Malcolm, head of exchange strategy and cryptocurrency research at UBS. “Probably by 2024, the whole world will look much more coherent and watertight.”

Gary Gensler, head of the US Securities and Exchange Commission, told CNBC on Thursday that while the crypto space is regulated, investors “need better protection.”

The Wall Street Journal reported that the SEC and the US Department of Justice are investigating the FTX. The Justice Department declined to comment.

At a conference in Indonesia on Friday, Binance’s Zhao said the 2008 financial crisis is “probably an accurate analogy” for what is happening.

“We are a few years behind schedule,” he said. “Regulators will legitimately scrutinize this industry much, much harder, which is probably a good thing, to be honest.”

— Allison Morrow contributed reporting.