Bankruptcy of FTXAre we witnessing the end of cryptocurrencies?
The failure of the FTX platform undermines investor confidence and threatens the young cryptocurrency sector, pushing its main players to mobilize to save it.
The boss of the largest cryptocurrency exchange platform, Binance, did everything to reassure on Tuesday: “The projects that will survive this difficult period will be much stronger in the future,” said Changpeng Zhao, in response to questions. Internet users on Twitter. But for now, the market is rocking. All cryptocurrencies are valued at $870 billion, according to data from Coingecko, a site that lists more than 13,000 of them across 600 exchanges.
Less than ten days ago it was over $1 trillion, and at its highest a year ago, $3 trillion, most of which evaporated as bitcoin prices crashed. (-74% over one year), but also Ethereum (-73%) or Dogecoin (-67%). The bankruptcy of FTX, still considered in early November as one of the most reliable platforms, reminds investors of the uncertainty that reigns in the sector.
But it also has a more direct effect: the company must liquidate its cryptoassets and its stakes in companies to pay off its creditors, flooding the market. And cryptocurrencies are already recovering from a similar crisis in the first half of the year when the cryptocurrency Terra saw its price collapse, dragging bitcoin down with it.
But this time around, FTX was an even bigger player. “There are parallels to be drawn with Lehman Brothers”, the Wall Street giant whose bankruptcy in 2008 had amplified the financial crisis, worries Walid Koudmani, analyst at XTB, who confirms to AFP that the question of an outright end to cryptocurrencies may arise.
The plunge in cryptocurrencies, however, comes in a rising global market, and seems to indicate that cryptoassets are not yet significantly correlated with the real economy. “I don’t think the industry or the concept of ‘cryptocurrency’ is going to cease to exist,” he tempers, however.
For many observers, the survival of the sector will go through a calming down, far from the decentralized and deregulated ideals of the first hours. Already, in 2017, bitcoin had seen its price soar before collapsing, but after several lean years, nicknamed “crypto winter”, it had started again with a vengeance at the end of 2020, rising to a record high of almost $65,000 in early 2021.
Marion Laboure, analyst at Deutsche Bank, believes in a note that the setbacks of FTX will help clean up the sector: “We believe that this second “crypto winter” will be positive because the fall of FTX will push the crypto ecosystem to adopt standards and a form of self-regulation akin to traditional finance”. For now, “market concentration is stronger than ever, with Binance as the big winner,” she notes.
It remains to be seen whether the current main players, exchange platforms such as Binance or Coinbase, will be among the survivors. They allow users to buy and sell cryptoassets, but also offer more or less complex derivative products on these already very volatile assets, and are at the heart of the ecosystem.
But they are often based in regions with loose legislation: FTX is headquartered in the Bahamas, while Binance has no centralized headquarters, making the job of regulators difficult. The bankruptcy of FTX is causing some users to withdraw their funds, as they fear that their buying platform has also used their cryptoassets to invest.
“We must be wary of platforms, because what we see is the equivalent of a bank panic”, warns Mr. Koudmani. Among the platforms in turmoil, the most important is now Crypto.com, whose boss has acknowledged a transfer from an internal wallet to the outside of several hundred million dollars, but claims to have recovered the funds.
Binance, for its part, claims to have the necessary liquidity to deal with the crisis, and says it is ready to publish “proof”, and says not to lend its customers’ money without their knowledge. Mr. Zhao announced on Monday the launch of an appeal fund and also proposed the creation of an industry body that would bring together the biggest players in the sector.
But he also said he was going to rescue FTX early last week, before giving up on the magnitude of the task.