Timely Insights

Market Update: FTX Collapse Rattles Crypto Markets—Where Do We Go From Here?

San Francisco • November 9, 2022

The crypto market is trading down sharply today. As I write this note, Bitcoin is down 10% in the past 24 hours, Ethereum is down 17%, and smaller assets like Solana are down even more. 

The root cause is the collapse of the crypto exchange FTX and the likely collapse of its affiliated trading arm Alameda Research. One week ago today, FTX was one of the largest and fastest-growing crypto exchanges in the world. Today, it is essentially out of business after fears of a liquidity crisis sparked a classic “run on the exchange.” FTX’s chief rival Binance has tentatively agreed to acquire FTX’s assets in a salvage acquisition intended to ensure customers are made whole, although its offer is non-binding and could be pulled.

Bitwise did not trade on FTX and has never held FTX’s token (FTT) in the Bitwise 10 Crypto Index Fund. Although the token at one point had a market capitalization in excess of $10 billion, it never passed the risk screens for our flagship index.

Still, FTX’s collapse is likely to shape the crypto market in significant ways going forward. As a result, we have prepared this FAQ to explain what happened, what it means, and where crypto goes from here.

The FTX Collapse: Key Questions

What is FTX?

FTX is a crypto exchange. It caters primarily to international customers and has a strong presence in derivatives and leveraged products.

How significant was FTX?

FTX was large and growing fast. In October, the firm processed $37 billion in trades. For context, Coinbase—the largest U.S. crypto exchange—processed $47 billion in trades that same month.

FTX’s footprint was bigger than just its exchange, however. The firm’s CEO, Sam Bankman-Fried (SBF), owned an affiliated trading firm called Alameda Research that controlled more than $14 billion in assets and was one of the largest crypto-trading firms in the world. Today, many observers believe that Alameda Research is insolvent as well.

SBF was also a popular voice in the media, appearing regularly on CNBC and being featured on the cover of magazines like Fortune and Forbes. He had a strong presence with lawmakers and regulators, regularly testifying before Congress and helping to shape crypto’s regulatory future.

How did things go wrong for FTX?

Crypto exchanges are supposed to work simply. Customers deposit assets so that they can trade, and the exchange holds those assets safely in custody. That way, if customers ask for their money back, the exchange can give it to them.

FTX seems to have deviated from this script. Although we don’t know the precise details, it appears to have lent customer assets to—or otherwise invested them with—its affiliated trading arm Alameda Research (or other potential firms), which may have then engaged in risky and/or illiquid trades. Everything appeared to be fine until this week, when rumors of FTX’s insolvency caused customers to demand their money back en masse from the exchange. FTX couldn’t come up with the cash to meet customer withdrawals, so it tried to sell itself to Binance in an emergency deal.

It’s worth noting that Binance isn’t a bystander in all this; the firm publicly stoked the rumors about FTX’s issues, contributing significantly to the run. Crypto can be cutthroat.

What does this mean for crypto short-term?

The failure of one of the leading companies in crypto due to managerial and/or ethical reasons is a stain on the industry and a significant setback. It damages confidence and destroys trust. Large investors that would have entered the industry will likely pause, and regulators that might have looked favorably on the industry will take a more skeptical look.

More immediately, attention will focus on whether the Binance deal will close. The agreement is non-binding and subject to due diligence, which means it could fall apart. A failure of the deal would further shake markets.

Beyond that, concerns will focus on Alameda Research, which is not included in the Binance deal. The firm may be forced to unwind trades to meet margin calls, which could drive down the price of certain assets. For example, Alameda is known to have significant holdings in Solana (SOL), and many believe that forced selling by Alameda contributed to SOL’s large pullback today (down 33% in the past 24 hours).

There may be unexpected knock-on effects as well. Firms holding FTX’s FTT token will see major losses, and the sharp drop in crypto assets like Solana could put leveraged traders into distress. 

Beyond the immediate impact, this event will likely accelerate a discussion around the proper regulatory framework for crypto exchanges. There has been a long-standing debate on whether the SEC, the CFTC, or both entities should regulate crypto exchanges, and we expect those discussions to intensify. At the same time, well-run exchanges are now considerably more likely to implement security measures such as “Proof of Reserves,” a mechanism that allows exchanges to cryptographically prove that they own reserves in excess of customers’ assets.

Bottom line: We will likely see significant volatility from the aftereffects of this event for months.

What does this mean for crypto over the long term?

Long-term, the failure of FTX does not alter crypto’s promise.

Crypto has lived through multiple collapses in its 14-year history: Mt. Gox, Quadriga, Celsius, BlockFi, Three Arrows Capital, Voyager Digital, and now FTX, among others. Each failure felt catastrophic. Mt. Gox lost 7% of all bitcoin in the world, for instance, while BlockFi had 500,000 retail accounts.

Each time, crypto prices faltered before ultimately finding their footing. We think that will happen here, too.

The reason that none of these collapses fundamentally damaged crypto is that none reflected a fundamental issue with crypto itself. FTX’s collapse doesn’t affect crypto’s extraordinary ability to move money over the internet, or DeFi’s ability to program money like software. It doesn’t take away public blockchains’ capacity to create digital property rights, or materially slow the growth of Web3. Instead, it reflects one inexperienced financial executive who flew too close to the sun, putting short-term profits and greed ahead of long-term enterprise value and customers. Sadly, it’s a tale as old as time.

Events like this rattle the market and delay the start of new growth periods. Crypto will take time to digest the fallout of FTX’s collapse, and some investors will be wary to jump back in until it’s clear that there are no more shoes to drop. While I previously thought a new bull market could begin as soon as the start of the new year, that dream may now be deferred until the healing can be completed.

Still, I do not expect this to alter crypto’s long-term potential, or even where it will be a year from now. It adds a frustrating detour on our path, but does not change the destination.

We will continue to monitor developments here at Bitwise, as we have for the past five years. We remain committed to keeping you up to date as things develop.

Best regards,

Matt Hougan

Matt Hougan

Chief Investment Officer

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About Bitwise

Bitwise Asset Management is the largest crypto index fund manager in America. Thousands of financial advisors, family offices, and institutional investors partner with Bitwise to understand and access the opportunities in crypto. For six years, Bitwise has established a track record of excellence managing a broad suite of index and active solutions across ETFs, separately managed accounts, private funds, and hedge fund strategies. Bitwise is known for providing unparalleled client support through expert research and commentary, its nationwide client team of crypto specialists, and its deep access to the crypto ecosystem. The Bitwise team of more than 60 professionals combines expertise in technology and asset management with backgrounds including BlackRock, Millennium, ETF.com, Meta, Google, and the U.S. Attorney’s Office. Bitwise is backed by leading institutional investors and has been profiled in Institutional Investor, Barron’s, Bloomberg, and The Wall Street Journal. It has offices in San Francisco and New York. For more information, visit www.bitwiseinvestments.com.

  • Matt Hougan

    Matt Hougan

    Chief Investment Officer
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