It has already been written that the universe of digital assets is changing from crash to crash. The tremors are intended to be more systemic, being felt throughout the chain leading to upstream mining. In the absence of regulation, or even regulation, the cryptosphere remains a prisoner of its lack of credibility.
The digital asset world is experiencing one of the worst years in its young history in 2022. Last drama in the running: the lack of liquidity expressed by the FTX exchange platform, which caused the price of the FTT token to collapse. This token went from US$22 to below US$4 in a single session on Wednesday, a drop of some 80% that lowers FTT’s market capitalization below US$530 million.
The shock wave was immediately felt by the cryptocurrency investment fund Alameda Research, which, along with FTX, is part of the crypto empire of billionaire Sam Bankman-Fried, we read on the Web.
As of June 30, Alameda Research had assets of US$14.6 billion and liabilities of US$8 billion, of which US$5.8 billion were made up of FTT, or roughly one-third of assets and 88% of net worth. from Alameda. Worse, of these 5.8 billion, 2.6 billion are illiquid since they serve as “collateral” or guarantee. And the whole thing is now only based on a market value reduced by 80%.
For FTX, the world’s fourth-largest exchange by volume, the liquidity shortfall is estimated at around US$6 billion. The other exchange giant, Binance, had filed a non-binding takeover offer for FTX, conditional on due diligence. Binance quickly pulled out. “We have decided not to proceed with the transaction to acquire FTX.com,” he explained. in a Twitter post. The company also mentions the appearance of press reports on mismanagement of client funds by FTX and on investigations by US authorities.
too many levers
Simply put: FTX leveraged leverage without practicing proper risk management. Digital asset broker GlobalBlock is keen to clarify that FTX’s problems take the form of a classic liquidity crisis, with the platform unable to sell its assets fast enough to meet withdrawal demands from investors or lenders. Blockchain technology is not the issue. On the contrary, this technology serves as a foundation for the crypto-asset industry, which has been reinforced by the recent Ethereum “merger” operation.
For his part, the CEO of Binance said on Twitter that two lessons should be learned from the FTX case: “never use a token you created as collateral” and “never borrow when running a crypto business”.
Nevertheless, these problems are once again shining the spotlight on the fragility and shortcomings of an ecosystem subject to all risks. They make regulation more than necessary, a framework that would notably help to establish confidence in the industry and attract more institutional investors.
Overwrite of stablecoin algorithmic TerraUSD and Luna, bankruptcy of the lender Celsius and forced liquidation of the hedge fund Three Arrows Capital… Events have been jostled lately in the cryptosphere. GlobalBlock adds to this, returning to all these simultaneous bankruptcy announcements among bitcoin miners. One thinks of Argo Blockchain, which announced at the end of October the stumbling block of the £24 million financing transaction from a strategic investor.
The previous week, the largest bitcoin miner by computing power, Core Scientific, pointed out that its liquidity problems could push it into bankruptcy. Shortly before him, another mining specialist, Computer North, closed the books, leaving behind a debt of 500 million distributed among some 200 creditors. Deteriorating economic conditions, rising energy costs and the use of high debt leverage are causing many of these energy-intensive miners to falter.
A brief reminder of the risks
A quick reminder of the long list of risks associated with investing in cryptoassets. First, the extreme volatility of prices. We also speak of an underlying value that is too often subjective, unrelated to reality. For the ” stablecoins », we have seen with Terra that this value is quickly put to the test in a context of market setbacks. It has already been written that, despite its name, there is no guarantee that this type of virtual currency provides protection against loss of value, and that the nature and quality of the underlying asset can vary greatly. .
We can also see that these assets are suffering from a lack of liquidity, which makes them difficult to sell in a context of adversity. They can also suffer from the absence of mechanisms for stopping trades in periods of high price pressure.
What can be said, too, of the monitoring of this market, which is rather limited given the absence of a regulated trading venue, and the numerous presence of issuers that escape any verification and any capital requirement.