Another major crisis for Bitcoin

Cryptocurrencies (and more specifically Bitcoin) are experiencing an unfortunate new development. What’s going on? A look back at the chaotic week that may have marked a turning point for the industry.

Within days, it emerged that FTX, the third-largest cryptocurrency exchange, faced a liquidity crunch that ultimately led to its bankruptcy late last week.

The company, founded by industry figurehead and investor Samuel Bankman-Fried (SBF). had to deal with billions of dollars in withdrawals, sparking rumors of its impending demise. Binance, the world’s largest crypto exchange, appeared ready to save FTX – but quickly confirmed that it would not after viewing FTX’s financial statements.

What are the repercussions for the industry?

Binance CEO Changpeng “CZ” Zhao not only ruled out the takeover of FTX, he actively criticized how FTX used client funds. This is a frequent theme in corporate bankruptcies, especially in the cryptocurrency world this year. Other events of this type could emerge, and illustrate the lack of regulation, governance and a sufficiently robust internal control system within these companies.

Will there be a regulatory backlash?

Inevitably, the United States Securities and Exchange Commission – which regulates non-crypto markets – is looking into the matter. She does, however, have her hands full of precedents.

Is there precedent for the FTX implosion?

Unfortunately for retail investors, yes. This was the case with Celsius a few months ago, the company is still in bankruptcy proceedings, which means that customers still do not know the fate of their money (cash and currencies). This case highlighted the issues of separating customer money from company money. But also on the broader concept of “custody” in the world of crypto-currencies.

What does this mean for Bitcoin prices?

Bitcoin (BTC) has now fallen 22% in the past five days to move towards $16,000. The currency had broken below $20,000 in June, a key technical level, but managed to hold above it until this week. Since the beginning of the year, the price of Bitcoin has plunged by 65%, which means that it has erased the gains of the last two years.

What does this mean for the cryptocurrency ecosystem in general?

The course of Coinbase (“No Moat”), the largest stock exchange listed in this field, collapsed. It has fallen 22% in the past five days and is down 81% this year. A reminder: Coinbase’s IPO price was $250 and it’s now $45.

Is there a risk of contagion to other markets?

For the moment no. Global markets are in fact attempting a mini-recovery after a difficult year, which is more linked to macroeconomic factors (inflation, rate hikes, war in Ukraine) than to idiosyncratic risks. The S&P 500 index gained nearly 4% over the month after falling 20% ​​this year. What the crypto drama does, however, is that it shows (once again) the volatility that comes with high risk assets.

What about the venture capital industry?

Venture capital companies, as well as many management companies, pension funds or sovereign wealth funds, have invested heavily in the world of cryptocurrencies in recent years. Sequoia Capital is the latest venture capital firm to burn its fingers – it just delisted its stake in FTX at zero, losing more than $210 million in the process. Investments in this area are a web of ‘conventional’ capital, risky assets and reputable companies.

© Morningstar, 2022 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered an invitation or encouragement to buy or sell the securities listed. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial adviser or finance professional before making any investment decisions.

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