Impact of the FTX incident: market conditions and subsequent risk prediction

1. Event Review

The FTX incident seems to have entered a new phase on November 9 , and what happened in the past 24 hours will almost certainly be etched in the history of the cryptocurrency industry. Here is the current situation of the incident. We hope to give readers a full picture of the whole thing through some key numbers:

1) On November 2, Coindesk revealed that Alameda's balance sheet had great risks, with about $6 billion of its total $14.6 billion in assets being FTT and SOL.

2) On November 6, CZ tweeted that he would gradually sell off the approximately $23 million of FTT he held. After the news came out, FTT began to fall. After Alameda CEO expressed his willingness to buy the FTT that CZ wanted to sell at $22, the price stabilized at around $22. However, in just two days, nearly $1 billion of assets have flowed out of FTX and Alameda.

3) At 11:00 on November 8 (UTC+8), there were rumors in the market that FTX sold 100 million bits and other tokens it held to replenish liquidity. This news further triggered market concerns about the break of FTX’s capital chain and caused FTT to fall to $16. However, in the afternoon of the 8th, no coins were transferred out of several hot wallets of FTX for 2 hours, which further caused panic, and FTT led the market to continue to fall.

4) At 0:09 on November 9 (UTC+8), SBF and CZ tweeted simultaneously that FTX and Binance had reached a non-binding agreement: Binance will acquire FTX Global Station to help FTX cope with liquidity crunch. After the announcement, the market rebounded sharply, FTT returned to above $20, and BTC and ETH also returned to $20,000 and $1,500 respectively.

5) At 2:00 am on November 9, the U.S. Commodity Futures Trading Commission said it was monitoring Binance's acquisition of FTX. Some people believe that the rapid acquisition may be due to the relatively cheap amount, which will cause losses to FTX's previous investors and may violate the antitrust laws of various countries. These voices have caused the market to worry about whether the acquisition can be completed. To make matters worse, SBF stated in an internal letter to the company on Tuesday morning that FTX had withdrawn $6 billion in the past three days, which made the market realize that FTX's funding gap exceeded previous expectations.

At 8:00 on November 9, FTX suspended all cryptocurrency withdrawals. This series of events led to a further collapse of the market. So far, the price of FTT has fallen below $5, BTC has fallen below $17,000, and ETH has fallen below $1,300. Currently, the number of stablecoins in FTX's wallet has fallen by more than 80%, currently less than $200 million, and there are less than 40 BTC.

2. The impact of the FTX incident and subsequent predictions

2.1 Impact of the FTX incident

The impact of this FTX crash may go beyond the scope of institutions that were implicated but not bankrupted during the previous collapse of Luna and 3AC, and will have a profound impact on every corner of the industry. Institutions that continue to participate in lending to FTX in this round are at great risk of liquidation. We can understand the impact of this incident from three levels:

a) Directly affected layer: projects directly invested by FTX and Alameda, as well as centralized institutions that have direct lending and cooperation relationships with FTX. The project level mainly includes important public chains and DEXs such as Solana, Fantom and Serum, as shown in the table below. These are the direct victims of the FTX crash.

We have analyzed Alameda's assets. Currently, the tokens with the highest value held by Alameda's monitorable wallets are as follows: BIT, SUSHI, FTT, SRM, LDO, MATIC, RNDR, etc.

BIT: It is currently unclear whether it will violate the promise to unlock. FTX has promised not to unlock, but the value of bit in the Alameda wallet has reached 23%. The market confidence is insufficient and it is a high-risk currency.

SUSHI: Alameda has a total of 3.4 million xSUSHI, and can withdraw 4.8 million SUSHI, but the price of large-scale liquidation on the SUSHI chain is very low and is not expected to reach the target. It is relatively safe at present. At present, the market’s fear of Alameda’s huge holdings has led to a lack of confidence.

MATIC and RNDR: They have strong liquidity and are not SOL assets. They are likely to be sold first to recover funds. RNDR has fallen by 26% and MATIC has fallen by 20%. If the tokens in the balance are transferred to the trading platform, they will continue to fall.

FTT: FTX’s own platform currency. It is said that Alameda has also borrowed a lot from FTX and used it as collateral. However, the borrowing and lending do not exist on the chain, so the specific liquidation details cannot be known. Based on the collateral, the FTT coin price is favorable to Alameda, and it may be used as a last resort.

SRM: Among them, FTX and Alameda are the projects that are closely related, and the relationship has always been very close. The current coin price has been severely broken, and like other protocols on Solana, the TVL has fallen by 20%-30% in 24 hours.

SOL: There is a risk of large asset liquidation on the chain. A large holder on the chain currently has 2,095,598 SOL (worth more than 38 million US dollars) in collateral and 48,038,000 USDC in debt. If the oracle is restored, liquidation will be triggered, causing a sharp drop in prices.

As for the organizations that have business ties with Alameda, there is no public information to confirm it, but they must exist.

b) Indirect impact layer: Alameda is a market maker and equity swap project, or projects that are heavily tied to assets such as FTT, such as bitDao, MIM, etc. Although these projects do not have FTX's investment, they have in-depth business dealings with it and will also be greatly affected under the current circumstances.

c) Radiating layer: other assets in the market, which are mainly affected by related assets and driven by market panic.

In short, in the three years since FTX’s rise, as the second-ranked centralized trading platform, its tentacles have penetrated into every aspect of the industry. We can no longer fully quantify how much loss this incident will cause to projects, but we can qualitatively say that compared with the Luna incident, the FTX incident is the Lehman incident in the cryptocurrency world.

2.2 Subsequent market conditions and progress forecast

a) In terms of the market, before the FTX crash, the market was already in a relatively deep bear market. With the tightening of macro monetary policy and events such as Luna and Three Arrows Capital, BTC fell all the way to $18,000. However, in recent months, although the Fed's continued sharp interest rate hikes have tightened the macro environment, the entire market has entered a relatively stable stage. BTC not only maintains the $18,000 mark, but also slowly rebounds to around $21,000. Seeing that the peak of interest rate hikes is about to pass, the collapse of FTX has caused the market to turn downward, BTC has fallen below $17,000 again and ETH has fallen below $1,300. The last time BTC was seen at around $17,000 was in November 2020, two years ago. Therefore, it can be said that except for the five-month-long, time-tested $18,000 mark, which can be trusted, the prices below it are not very credible at present, and the market has not reached a consensus on the next key point.

b) From the possible path of the development of the incident, first of all, Binance's acquisition faces many difficulties: this acquisition faces the risk of review by US regulators and the legal risk of possible violation of antitrust laws, all of which may lead to the failure of Binance's acquisition. In addition, FTX's financial loopholes far exceed market expectations, so much so that CZ also tweeted his feelings, and scared off other possible acquirers in the market, such as Coinbase, which clearly stated that it would not acquire FTX. Based on the above analysis, we believe that Binance's window for acquiring FTX is getting smaller and smaller, but in order to maintain the influence of American local elites in the currency circle, it is possible that American local forces will eventually take action to complete the rescue of FTX. But from the current point of view, the whole thing still has no light at the end, and the market will still be tortured by pain before a turnaround occurs.

c) From the perspective of the impact on the industry: This incident has once again triggered the industry's distrust of centralized trading platforms. In order to strengthen industry confidence, Binance and Huobi have both stated that they will publicly disclose the auditable Merkle tree's proof of reserve or POF within a month. At the same time, voices within the industry have risen again to strengthen supervision. For example, Coinbase CEO said that the FTX incident will lead to stricter supervision of the crypto industry in the United States. From the perspective of industry norms, this incident will become a landmark historical event.