New Delhi: The running accident Cryptocurrency prices are largely due to misconduct by particular major players in the crypto market, as well as the lack of regulation allowing such activities to happen. Macroeconomic conditions haven’t helped either.
Bitcoin, which accounts for about 41 percent of the crypto market, has seen a massive drop in its price over the past year. From $64,400 per bitcoin on November 12, 2021, the price is now hovering around the $16,500 range. Other, smaller cryptocurrencies have seen similar declines in price. From being the darling of new age investors and those looking to make a quick buck, how has the crypto market been ravaged like this?
“Think of it as multiple factors, like Fed rate hikes, stock markets falling, etc., and events like what happened at FTX,” said Sharan Nair, co-founder of PYOR. in blockchain services – and also part of the founding teams of Unocoin and CoinSwitch.
“However, there are some factors that have a huge impact, such as the 3AC case, and more recently, FTX,” explained Nair. “The FTX crash is massive. I would say FTX contributed about 70 percent to the crash today.
FTX is a Bahamas-based cryptocurrency exchange that was established in 2019. Since then, the company has gained a reputation for being one of the most stable and respected firms in the crypto industry. This reputation was also built largely on the respect of its founder within and outside the industry.
‘Poster-child of the crypto industry’
A crypto industry insider, who declined to be named, told ThePrint that the founder of FTX – Sam Bankman-Fried – was a “poster-child” of the crypto industry, a status that contributed to the disastrous consequences of his misconduct. played a big role in
“Everyone in the industry knew and looked up to him. He was considered the essential leader of the industry. Even for regulators and senators in the US, he was one of the people in the industry trusted by lawmakers,” the insider said.
In fact, such was the respect for Bankman-Fried that he was even compared to other people. J. P. MorganFounder of the investment bank that bears his name, which came to the rescue of several companies during the financial turmoil in America in the early 1900s.
“That’s why what he did has caused so much damage,” the insider said. “Apart from the financial aspect, the fact that he was so trusted is now a huge disappointment in the industry, as well as a real hit to investor confidence.”
what happened on ftx
Published by crypto news portal Coindesk.com on 2 November report goodAfter analyzing FTX’s balance sheet, it showed that the exchange’s assets under management (AUM) were largely held in the form of FTX’s own crypto token called FTT.
Now, as any investor worth their salt will say, diversification is one of the safest practices when handling investments and, conversely, concentrating funds in one instrument is extremely risky. But this is what FTX and its founders were doing, which was ultimately very harmful to them.
around the same time, also came to light that Bankman-Fried was routing FTX clients’ funds to Alameda Research, a trading firm founded by him. Alameda Research, for its part, was using these funds to take on more debt and raise more money.
Now, this is where the regulators would have stepped in, if there was any regulation at all. In India, for example, the Securities and Exchange Board of India (SEBI) has specific rules that brokers cannot touch clients’ funds in this way. No such regulation exists in India or abroad for the cryptocurrency space.
It was when these two news stories – that most of the assets were in the form of a cryptocurrency, and that user funds were being taken out of the company – became public that the problems really began.
Binance’s move shook the market
Another cryptocurrency exchange and early investor in FTX, Binance held a large number of FTT tokens. Hearing the news about FTX, Binance announced Last week it would sell its entire holding of FTT, saying it was protecting its interests and reducing its exposure to a riskier asset. About $2 billion worth of FTT tokens are being sold in this sale at one go.
This, naturally, shook the market and triggered a massive sell-off where other holders of FTT also started selling their tokens. As would be expected in a situation where there is a glut of supply, FTX price dropped by more than 30 percent after Binance’s announcement and kept falling.
transition effect
The fall in the price of FTT had a huge infectious effect. Remember how Bankman-Fried was using FTT tokens as collateral for loans? Well, those chickens came to settle in the house. With the value of that collateral in freefall, creditors asked Bankman-Fried to add more collateral to secure the loan. Now, Banksman-Fried couldn’t do that. He tried and failed to raise funds from private sources. In addition, Binance also has a deal to buy FTX fell throughFTT further affects the value of the token.
It was at this point that Bankman-Fried resigned as CEO of FTX and the company. filed for bankruptcyThat left the disaster in its wake, and left crypto prices across the globe at record lows.
However, this infection did not end here. Bankman-Fried was a large investor in Solana – another blockchain platform – and owned a significant number of that platform’s token, Solana BTC. As events unfold around FTX, public confidence in Solana BTC too fell earlyDue to which its price has come down drastically.
The event also rattled crypto market participants, and so their reactions to other bad news have been disproportionate.
Following news After Crypto.com mishandled transactions worth $400 million by depositing funds into the wrong type of account, customers of the exchange rushed to withdraw their funds from the exchange. The value of Crypto.com’s own cryptocurrency fell nearly 20 percent in a single day.
other factors at play
According to industry participants, the FTX saga is unfolding at a time when investor confidence within and outside the crypto industry has waned. Inside, FTX comes on the back of another – albeit minor – crisis in the industry this year, where Three Arrows Capital (3AC) saw $10 billion in assets fall to zero,
while it is still very small compared to drop from $16 billion to zero In the wealth of Bankman-Fried, it was still a crisis big enough to shake the crypto industry.
The difference was that Bankman-Fried’s reputation was such that its collapse dealt a devastating blow to investor confidence.
Other factors that dampen the mood in the crypto market are more common, affecting other industries as well. Rate hikes by the US Federal Reserve, sluggish activity in stock markets around the world, and increasing layoffs among Big Tech companies are all factors that have significantly reduced investor confidence in quick returns from the crypto market.
The FTX explosion was like a hammer to a weak foundation. Whether this is the final blow remains to be seen.
(Edited by Geetalakshmi Ramanathan)
Read also: Why cryptocurrencies became an investor favorite in 2020 and how their value is determined