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Will the latest crypto crash have wider implications?

4 minute read

The collapse of the FTX exchange has sent shockwaves through crypto markets.

Within the space of only a fortnight, FTX has gone from being one of the largest and most respected crypto exchanges in the world to filing for Chapter 11 bankruptcy in the US, pushing Bitcoin and other major cryptocurrencies to their lowest levels in years.

Major institutional investors like BlackRock, VanEck, SoftBank, Tiger Global and the Ontario Teachers Pension Plan have previously been backers of the crypto company.

But alarm bells started to ring following a report from crypto news outlet CoinDesk on 2 November, which suggested that Alameda Research, the trading firm of FTX CEO Sam Bankman-Fried, had substantial holdings of FTX’s native token FTT.

On 6 November, Binance CEO Changpeng Zhao announced that the world’s largest crypto exchange would liquidate its entire holding of FTT. FTX was then hit by a liquidity crunch, with around US$6 billion in withdrawals in the space of only 72 hours.

Binance looked set to acquire FTX, based on announcements from the two crypto CEOs on 8 November. However, Mr Zhao confirmed that Binance had pulled out of the deal a day later.

FTX went on to file for bankruptcy on 11 November, with Mr Bankman-Fried resigning as CEO. Binance has since stopped accepting deposits of FTT “to prevent potential of questionable additional supplies affecting the market”, according to a tweet by Mr Zhao.

Amid the crypto market volatility, Bitcoin dropped under US$16,000 for the first time since November 2020 and currently sits well below its high of over US$68,000 in November 2021. 

This has come after significant monetary tightening by central banks including the US Federal Reserve, which earlier this month lifted rates by 75 basis points (bps) for the fourth time in a row.

“Cryptos were a beneficiary of easy money and have been suffering from its withdrawal. Financial accidents are common outcomes of Fed tightening cycles and the latest crypto problems could have further to go,” predicted AMP chief economist, Dr Shane Oliver.

“While this may be bad news for crypto traders and Lamborghini sales, it’s unlikely to have a major impact on global growth and share markets as investor and financial system exposure to it is relatively low. Gold looks to be a key beneficiary.”

2022 also saw the collapse of the stablecoin TerraUSD and its sister coin, Luna. In May, TerraUSD lost its peg to the US dollar, leading the price of Luna to fall below a fraction of a cent.

“The industry will learn from some of the significant missteps we have seen this year, including Luna and Celsius, which will almost certainly lead to more transparency across the space long term, helping to bring more accountability and trust into the crypto market,” commented eToro market analyst Josh Gilbert.

“Bitcoin and other crypto-assets will likely remain under pressure until we see more clarity around this issue.”

Mr Gilbert noted that the easing of US inflation depicted in the latest figures released by the US Bureau of Labor Statistics last week has provided some relief to Bitcoin and other crypto-assets.

“This data print couldn't have come at a better time, and crypto investors will be breathing a sigh of relief. However, this is a short-term boost to markets and there is still a long way to go to bring inflation down to the Fed’s target rate,” he added.

“As inflation does begin to come down and we see clear signs of rate hikes having their desired effects, investors will slowly begin to add risk assets, such as crypto-assets, back into their portfolios again.”

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.