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Is the FTX debacle the Lehman Brothers moment for cryptocurrency markets?


Whilst the S&P 500 and the Nasdaq were up almost 5% and over 6% respectively on Thursday, Bitcoin failed to overcome the $17,500 level, due to the failure of FTX.

Many investors have been waiting on the side-lines for inflation to show convincing signs of inflecting down before entering the crypto market. Thursday was the first time we had some evidence to suggest inflation may have peaked, as CPI dropped from 8.2% in September to 7.7% in October and coming in lower than expectations by 0.2%.

“We may not be at a turning point from a macroeconomic perspective yet, but the fact that nearly all price measures decreased from the previous month to now provides optimism for bulls,” said Marcus Sotiriou, an analyst with listed digital assets broker GlobalBlock. “In fact, Core CPI, excluding the laggard of shelter inflation, is negative 0.1% – this is the first negative read since May 2020. This CPI report has led to the Fed funds futures now pricing in the odds of a half-point increase at the next meeting to 80%.”

Why is crypto being left behind the global markets with this positive economic news?

The downfall of one of the largest crypto exchanges, FTX, has created havoc. Misuse of customer funds has led FTX to become bankrupt, as they have announced the start of voluntary Chapter 11 proceedings. FTX reportedly had $16 billion in customer assets and $10 billion was given to Alameda Research, an FTX subsidiary, for trading purposes.

“FTX is crypto’s Lehman Brothers moment,” said Nick Saponaro, CEO of Divi Project. “In fact it’s worse. In ’08, investors would have had some protection. FTX’s investors will not and if history teaches us anything, they will lose everything. Inevitably, global regulators will see this as their cue to step in and crack down hard on the industry, making it very difficult for DeFi providers to operate without the oversight of a third party. The polar opposite of why crypto was created.”

DeFi now has a very small window of opportunity to stand out and demonstrate its value before the regulator gets its claws in. “It is imperative we find ways to make DeFi less complex, more accessible, and raise software standards to limit malicious behaviour,” said Saponaro. “Until then, we will be at the mercy of the regulator and centralised propositions will continue to persuade people to use their services.”

The Armchair Trader attended a meeting of several large cryptocurrency hedge funds and investors last week. Although none could be quoted, the consensus among them was that investors in this market needed to tread warily at all times: the custody and security infrastructure, and counterparty exposure we more important in the digital assets space than, for example, within normal derivatives trading.

Is FTX really in for $50 billion?

A headline has been shared showing that, ‘Alameda Research LLC lists estimates assets and liabilities in the range of $10 billion – $50 billion’, which has alarmed people further. Even though this is true, it is just a range that had to be checked off in the court filing, and the true figure is likely much closer to $10 billion, according to sources within the crypto trading industry.

The knock-on effects for the rest of the industry remains to be seen, yet so far, we have seen BlockFi on the brink of bankruptcy. According to FTX, about 130 additional companies affiliated with FTX – including FTX US and Alameda Research – have also begun the bankruptcy process. Other subsidiaries in the Bahamas, Japan and Australia have seen their trading operations suspended by regulators and assets frozen.

So far, Bitcoin has not reacted too negatively to this news, as it stays around $17,000 (as of Friday evening) – the market could enjoy the fact it now has more clarity than a week ago. However, the severity of the contagion to come could have damaging effects for the crypto ecosystem. The potential reversal of the direction of inflation in the coming months could save crypto prices from spiralling down further, though, meaning inflation data is still critical to watch out for.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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