Crypto markets teeter as investors fear implosion

Hong Kong/Singapore — Cryptocurrency markets nursed heavy losses on Thursday, with bitcoin struggling to recover from a two-year low as investors fretted about the implosion of crypto exchange FTX and the future of the industry.

Larger rival Binance walked away from a bailout of FTX on Wednesday. FTX head Sam Bankman-Fried said he was “exploring all the options”, but fading hopes for rescue left FTX teetering. A message on the FTX website said: “FTX is currently unable to process withdrawals. We strongly advise against depositing.”

The focus is on the unknown amount of customer losses and the hit to sentiment from the latest and possibly largest collapse in an industry that has turned into a minefield for investors.

FTX’s native token, FTT, is down 90% this week and was attempting to steady around $2 — not far above its record low around $1.50. Bitcoin fell below $16,000 for the first time since late 2020 overnight and was last at $16,700.

Binance backed out of a non-binding offer to buy FTX after due diligence. Another exchange that declined to step in was OKX, which said it was also approached by Bankman-Fried who spoke of liabilities of $7bn that needed covering fast.

“Even Elon Musk would not be able to commit to a deal with $7bn liability within a few hours of negotiations. That was too much for us,” said Lennix Lai, director of financial markets at OKX. “It’s a big hole to plug. The dagger will continue to hang over the crypto market, as long as the outlook of FTX’s fate remains unclear.”

The seeds of FTX’s downfall were sowed months earlier, in mistakes Bankman-Fried made after stepping in to save other crypto firms, according to interviews with several people close to Bankman-Fried and communications from FTX and Binance.

‘Confidence crisis’

There are also signs that the fallout could spread beyond crypto markets, with jittery stock markets sliding on Wall Street overnight.

“A top exchange failing — that’s on a different level,” said Danny Chong, CEO of decentralised finance firm Tranchess, with potentially wider ramifications than the failure of stablecoin TerraUSD and crypto hedge fund Three Arrows Capital this year.

“People’s funds, including market makers’, are still with FTX,” he said. “Just when people were thinking that crypto winter might not last … along comes another episode like this.”

The US securities regulator is investigating FTX.com’s handling of customer funds and crypto-lending activities, according to a source with knowledge of the inquiry.

Bloomberg reported that the US Department of Justice is also looking into the turmoil. A DOJ spokesperson declined to comment.

Investors are already writing off funds placed in FTX. Venture capital fund Sequoia Capital wrote down a $150m exposure to zero on Wednesday. Canada’s Ontario Teachers Pension Plan, New York-based investment firm Tiger Global, and Japan’s SoftBank are also FTX investors.

Broker Robinhood said it has no direct exposure to FTX, but Bankman-Fried holds a stake in the firm and its shares fell heavily on Tuesday and Wednesday.

Most crypto investors remain bullish about the long term, but are braced for further falls in the short term. Bitcoin’s 20% losses this week are comparable with the drop in June when Three Arrows Capital came under stress.

“What makes this new phase … problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking,” analysts at J.P. Morgan said in a note to clients.

“Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong, it creates a confidence crisis.” 

Reuters