Bitcoin’s price plummeted by as much as 21% last week, marking the worst week for it in five months. Worries about the future of the cryptocurrency markets have been exacerbated by the turbulence surrounding the collapse of the FTX.com exchange. Its operator, which provided assistance to other failing companies in the industry during the spring slump in these markets, as recently as a few weeks ago, has itself turned out to be a colossus on clay legs. Bahamas-registered FTX was supposed to be rescued by its competitor Binance, but the latter eventually pulled out of the deal. As a result, the company was forced to file for insolvency on Friday and its CEO Sam Bankman-Fried to step down.
As a result, FTX has joined a long list of companies in the industry that have collapsed in recent months. Previously, hedge fund Three Arrows Capital, lender Celsius Network and brokerage firm Voyager Digital suffered a similar fate. The collapse of yet another empire in an almost unregulated industry has caused quite a stir among investors. According to analyst firm CryptoQuant, in one week alone, more than $6 billion flowed cleanly out of the bitcoin and ether markets.
According to some commentators, the consequences could be much worse. Investors in the industry are wondering whether an FTX insolvency will have a similar impact on the industry as the collapse of Lehman Brothers brought to the financial sector 14 years ago. Founded in 2019 FTX was until recently considered to be an extremely stable company, exactly how the bank that was about to collapse was perceived in 2008.
The company has worked with celebrities and with large corporations such as SoftBank and Temasek. It also sponsored the NBA club Miami Heat (FTX’s name was in the name of its arena), and its valuation until recently reached $32 billion. However, according to former US Treasury Secretary Larry Summers, comparisons with Lehman are not entirely accurate.
The FTX incident not only lowered confidence in the cryptocurrency business, but also encouraged global regulators to tighten the screw. Some of the industry’s greatest names have stated they will welcome the scrutiny if it helps restore faith in the crypto industry. There is “a lot of risk,” according to Changpeng Zhao, the CEO of Binance, the largest cryptocurrency exchange. “We have seen in the past week things go crazy in the industry, so we do need some regulations, we do need to do this properly,” he added.
References:
https://www.nytimes.com/2022/11/14/technology/ftx-sam-bankman-fried-crypto-bankruptcy.html
https://edition.cnn.com/2022/11/14/business/ftx-crypto-collapse-updates-hnk-intl/index.html