FTX collapses - crypto market and its fundamental value diverge

GB Market Commentary 09/11/2022

by Marcus Sotiriou

Bitcoin has made new lows since the June bottom earlier this year, as the crypto market has collapsed.

All of this is due to the unexpected collapse of FTX, which announced yesterday they are facing liquidity issues, hence leading to Binance stepping in to potentially acquire them (after due diligence has taken place in the coming days).

The underlying blockchain technology is not the reason for this crisis. In fact, blockchains will likely be the building blocks of everyday functions in the coming years. There is a difference between blockchain’s fundamental value and markets that investors/traders participate in. When leverage is used without proper risk management, it can lead to liquidations and mass panic, leading to institutions becoming bankrupt.

What did FTX do with client funds that put them in this position?

This information is yet to be told to the public, and we may never know, but what is clear is that centralised custodians that are not transparent or publicly listed cannot be fully trusted. In disasters, like we have seen yesterday, the market needs someone to bail out the bankrupt entity in order to save customer funds.

However, when there is no one left to bail out the company, that is when contagion can spread to other companies - in this particular situation we do not know yet if Binance can/will go through with the deal. Binance themselves are under investigation from the Department of Justice, Commodity Futures Trading Commission, the Internal Revenue Service and the SEC – can we really trust them?

Many of the problems of traditional finance which cryptocurrencies aim to solve are being replicated in the crypto market, as many centralised entities have become too greedy. However, decentralised applications and transparent centralised entities continue to operate as intended.

What does this mean for crypto prices?

In the short term, I think the market needs clarification on the Binance-FTX deal to see some relief. Until we have clarity about FTX, investors will remain fearful. A deal would be welcomed by everyone in the industry, as it would mean customers could potentially be made whole and other companies relating to FTX and Alameda Research could be unaffected. In any case, if blockchain technology will revolutionise many industries, then this collapse can lead to incredible opportunities for long term investors.