17 Nov 2022

The FTX collapse: More contagion

FTX was indeed insolvent, defrauding customers by co-mingling customer deposits while attending Capitol Hill meetings contributing to laying the groundwork for crypto regulation and attracting institutional capital en masse.
Source: WuBlockchain
We already covered the shocking chain of events last week through our Friday Focus recap and comments on the implications of this farce, where we argued that this will have long-term implications related to regulation and institutional presence and lead to distorted markets for a while.The FTX saga is yet another sad chapter in bitcoin’s soon 14-year-old history. It’s worthwhile noting that bitcoin has endured storms in the past and is likely to weather storms in the future. “Proof of Reserves” by exchanges is gaining traction, which could lead to a more transparent environment, which would be a positive going onward. Erasing bad actors from the sector is a net positive, albeit a painful process for many investors.Regardless, the FTX collapse has hurt many and will likely impact liquidity massively onward. Per our knowledge, the market maker Genesis Trading has suffered the largest losses, amounting to $175m stuck on FTX, while market-making firm Wintermute saw losses of $55m. The blowout of one of the key market makers in the space, Alameda, and significant losses at other market makers impacts BTC’s liquidity, as demonstrated by Kaiko Research this week.
Rational response: Self-custody
This travesty has revitalized the “not your keys, not your coins” sentiment and re-injected healthy skepticism among market participants. In the current environment, prudence is essential, and you should be very cautious with whom you trust to hold your crypto if you keep your crypto on an exchange. Crypto owners are responding by moving coins off exchanges. From November 1 to November 12, the BTC balance on exchanges fell by 66,472 BTC per Glassnode, a percentage decline of 2.8% from 2.36m to 2.3m BTC on exchanges. The decrease in ETH on exchanges has been even higher, falling 6.6% in the same period. Almost all exchanges experience growing withdrawals at the moment.
Source: Glassnode Exchanges in the chart are sorted by largest current BTC balance to smallest.
This is a slow bank run, with people moving their coins into self-custody. If any other exchanges are running similar schemes to that of FTX, this may expose their skeletons in their cupboard, as liabilities cannot be met. This article is a part of the the deep-dive section of our new market report: Ahead of the curve.
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