Recurring market commentary on what’s happening in the crypto markets, summarized by the Crypto Broker team at Crypto Finance AG.
Market commentary
Good Morning!
Bitcoin (BTC) is currently trading at the 16.85k price mark (-18.2% in 7 days) while Ethereum (ETH) fell back down and is getting traded at a price of 1.26k (-19.5% in 7 days). The price plummeted sharply, as expected, after the events surrounding FTX.
FTX dragging down the market
I won’t deep dive into the FTX/Alameda story today, as a detailed post-portem research report will follow from our team in the coming days. I will, however, say a few words about what happened. Despite the fraudulent moves FTX might have done, in the very end what happened could be related to liquidity duration mismatch and securities-backed lending. These are also old finance issues. Can a bank survive a bank run – on its own?
FTX saw around $6 billion in withdrawals in the 72 hours before Tuesday morning (according to SBF, they processed on average of “tens of millions” of dollars of net in/outflows), and this was a 27 standard deviation event. Even the Fed's balance sheet, which is currently $8.679T, has the following status:
- $4T in US treasury notes and bonds (at different maturities)
- $2T in mortgage-backed securities
- $2T in TIPS, US treasury bills, loans and special facilities
This means that - in an extreme scenario – even here things are not 1:1. Ever since the existence of companies, entrepreneurs have been pledging shares/company stakes etc. to secure bank/fiat etc. borrowings. If these shares are sold pursuant to the pledges, such sales could cause stock prices to decline.
Balance sheet of Alameda had a huge hole
Similarly, company stakes, real estate, etc. are “fairly” priced (market-to-market) at a certain point in time. Once the borrower is unable to pay back their loan, the lender will keep the collateral, and very likely sell it to get the money back. But what if the lender (let’s say a bank) is then unable to sell that house or company stake, and needs to sell it at a discount? The result will be a loss. (just think of Elon Musk and Tesla/Twitter).
It has always been known that Alameda (and many others…) was pledging FTT (and many other coins) as collateral in exchange for fiat. But still, everyone believed that they were doing so well and that their balance sheet was healthy. This was not the case. It is now believed that the hole is roughly $10 billion.
Looking ahead briefly to the short to medium term:
- Projects with a small market cap relative to the fully diluted market cap will be dumped hard
- Liquidity will shrink as many market makers are (i) out of business and (ii) re-assessing risk (especially counterparty risk) as they prefer to lose money for a couple of weeks, waiting for the chaos subside
- Macro figures will have less of an influence (and this is not the kind of decoupling we were all waiting for)
- High volatility - and very likely this is downside volatility
- Many companies will shut their doors as many hedge funds have funds locked in FTX (e.g., IKIGAI)
- More selling pressure will come as liquidation processes are underway, and companies will be required to sell their treasuries (you can begin by taking a look at all of the projects Alameda invested in)
FTX was able to provide users with one of the best trading experiences due to its GUI, fast API connections, and its once beloved margining and liquidation system. I always believed that Alameda (among others) was good enough to manage all that liquidity. And that its book was deep enough to always have two-way flow. This was always the case, until it wasn't. At some point in time, they were probably the only buyer of FTT in the entire market.
FTX system was to good to be true
Crypto is known to be a leveraged marketplace, but still the perfect (or at least working) clearing system needs to be found both for CeFi and DeFi. (This a great opportunity for many other players). Nevertheless, what FTX designed and did was really good. Now, reluctantly, I am forced to say that it was too good to be true. In a nutshell, this is how it worked - and it is fascinating:
- FTX liquidation engine: "Our Liquidation Engine - how we significantly reduced the likelihood of clawbacks from ever occurring"
- FTX liquidation flowchart: FTX Liquidation Process Flowchart
In terms of price: at the moment, I am biased towards further downside. It is too hard for me to believe that we are now seeing the bottom. In the same vein, I believe BTC dominance (currently 40%) will increase again, and might be back to May values (48% on May 12th), as a consequence of capital rotation into “safer” assets and decentralisation.I expect Exchange Tokens, which are/were holding up very well, will suffer. This is because many funds are re-assessing risk, and because - ultimately - they are not that different from FTT and FTX. Lastly, now more than ever is the time for DeFi to shine again - despite the fact that it is currently broken.
Happy Trading!
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Investments in virtual currencies are high-risk investments with the risk of total loss of the investment and you should not invest in virtual currencies unless you understand and can bear the risks involved with such investments. No information provided in this publication shall constitute investment advice. Crypto Broker AG excludes its liability for any losses arising from the use of, or reliance on, information provided in this publication.
All intellectual property, proprietary and other rights and interests in this publication and the subject matter hereof are owned by Crypto Broker AG including, without limitation, all registered design, copyright, trademark and service mark rights.
Disclaimer
This publication provided by Crypto Broker AG, a corporate entity registered under Swiss law, is published for information purposes only. This publication shall not constitute any investment advice respectively does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. This publication is not intended for solicitation purposes but only for use as general information. All descriptions, examples and calculations contained in this publication are for illustrative purposes only. While reasonable care has been taken in the preparation of this publication to provide details that are accurate and not misleading at the time of publication, Crypto Broker AG (a) does not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty of merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party’s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions contained in this publication.
Risk disclosure
Investments in virtual currencies are high-risk investments with the risk of total loss of the investment and you should not invest in virtual currencies unless you understand and can bear the risks involved with such investments. No information provided in this publication shall constitute investment advice. Crypto Broker AG excludes its liability for any losses arising from the use of, or reliance on, information provided in this publication.
