“Not your keys, not your cryptos”. While some investors learned the lesson before FTX collapsed, others blindly trusted crypto exchanges.
Admittedly, self-custodial crypto wallets are much less vulnerable to hacks than exchanges. Alex Kruger has a very different, but utterly compelling, perspective.
Legal uncertainty in the crypto market is a double-edged sword, which means investors should exercise caution. The first half of November taught us that there is no such thing as a perfect option, but exchanges certainly cannot be blindly trusted as we did before November 8th.
The fall of FTX will undoubtedly have disastrous consequences on the market. More than 5 million people worldwide are at risk of never recovering the funds they entrusted to the Sam Bankman-Fried crypto exchange.
The collapse of FTX has sent shockwaves throughout the crypto market, and it seems some investors don’t yet grasp the magnitude of the matter.
Crypto Exchanges Are Losing Credibility
According to Santiment’s latest survey, more than half of participants currently hold a third or less of their assets on exchanges:
It can be clearly observed that investors no longer trust crypto exchanges like before, which is completely understandable.
The abrupt collapse of FTX was a painful event for millions of investors. This distrust, which may seem excessive, is therefore completely legitimate. The incident most similar to FTX’s bankruptcy dates back to 2014, when Mt. Gox was officially liquidated.
Indeed, this address has been emptying the coffers of FTX since November 11. According to the latest information, the address belongs to Sam Bankman-Fried, who says he hacked his own platform at the request of Bahamian authorities.
The crypto market goes into panic mode
FTT’s price is down more than 98% from its all-time high. It all started when Changpeng Zhao decided to sell a large amount of the FTT tokens held by Binance. Due to its irresponsible management, FTX ended up with an impossible to service debt, which immediately caused a liquidity crisis on the exchange.
The collapse of FTX caused a FUD effect (fear, doubt and uncertainty) which shook the entire crypto market. As a result, discussions related to Bitcoin have again been relegated to the background.
In the graph above, we can observe that the social dominance of FTT (in yellow on the far right) rose since the second week of November (even before the official rug pull on November 8), just when rumors started circulating about the crypto exchange’s liquidity crisis.
When discussions focus on tokens linked to exchanges, prices tend to destabilize.
However, as our readers know, sometimes FUD can be a good thing for future market movements. When the majority of investors anticipate further dips and fear peaks, bearish sentiment is often followed by an unpredictable rise in price.
On the other hand, the graph below shows that whales are increasing their purchasing power.
Analyzing the graph, we observe two things:
- Binance USD (BUSD) and USD Coin (USDC) whales holding between $100,000 and $10 million quickly accumulated a large amount of stablecoins. For their part, the whales of Tether (USDT) seem more hesitant, but still continue to accumulate the asset.
- In contrast, Bitcoin shark and whale addresses holding between $1.7M and $170M continue to decline at an unprecedented rate, hitting a four-year low.
Although the whales don’t seem very optimistic about the course of Bitcoin’s price, they are increasing their “buying power” with the accumulation of stablecoins. This means the whales may be waiting for the right moment to re-enter the market.
Can we expect a return to normal?
Given recent events, some specialists believe that institutional and retail investors will no longer trust crypto exchanges. However, the trading volume of the top 10 cryptocurrencies by market capitalization is beginning to level off after exploding in the days following the FTX bankruptcy.
This means that despite the loss of credibility of some exchanges, most investors continue to use them.
Furthermore, recent events have caused a sharp drop in the correlation between equities and the crypto market.
The S&P 500 recently recovered to January levels, while Bitcoin hit a 2-year low, falling below $17,000 for the first time since November 2020.
Realized losses also increased significantly due to the price crash caused by the bankruptcy of FTX. Even so, the possibility of a crypto market rebound should not be discounted.
The last time the crypto market suffered so many weekly losses was in mid-June. And after hitting a low on June 17, Bitcoin’s price gained over 28% over the next four weeks.
Likewise, the number of BTC purchased at a higher rate than current market prices is also increasing. If the trend continues over the next week, this ratio could reach an all-time high.
The last all-time high was recorded in September 2019. At the time, Bitcoin’s price fell more than 26% in the span of two weeks.
Regardless of your opinion of recent events, it’s obvious that FTX’s bankruptcy was one of the worst-case scenarios imaginable for crypto investors. When investors worry about the security of their assets, the market tends to stagnate.
The growing interest in self-custodial crypto wallets is a good thing, because ultimately we bear the primary responsibility for the safety of our funds. That said, exchanges are necessary for the market capitalization growth of the crypto market.
Going forward, crypto exchanges will try to be more transparent about their reserves and liquidity. Something that will undoubtedly have a positive impact on the sector.
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