Last week was one of the biggest storms for crypto in the last decade. FTX group’s bankruptcy was a massive blow to the entire investor community across demographics and tiers, from private equity to reputed institutions and millions of retail investors. The effect of the same on BTC and the broader crypto market can be seen from the mid 13th of November.
While initial signs of a Lehman-style collapse were being seen, the issue escalated to Enronmus level of misconduct. Like any bankruptcy, this one caused a lot of value destruction across segments of the crypto economy and will take years to recover from its bruises fully. This is not the first time an exchange has gone bust in crypto, but the levels of second-order effects outweigh any other that have gone bust in the past decade. Mt.Gox, one of the earliest and largest crypto exchanges to go bust after a huge hack in 2014, still has absurdly varied effects on BTC and overall crypto markets, with multiple schedules of the hacked BTC entering the public markets. Although better-than-expected PPI (Producer Price Index) data gave a slight pause to the broader market on the evening of the 15th, the same failed to provide sustainable support, as mentioned in last week’s outlook.
FTX's Bankruptcy - Ledger of Ashes and what’s next
While the bankruptcy process under chapter 11 statutes was underway, assets worth $600 million were seen absurdly leaving the exchange reserves. This seemed suspicious as the company’s CTO – Gary Wang, had the highest number of commits to the exchange’s repo in a long time. In contrast, tether blocked a significant chunk of the funds being moved on-chain of ETH, is now in public attention, and has an unknown clock on it as all on-chain eyes are now monitoring those funds.
Another absurd inconsistency is that FTX’s global registration in the Bahamas made it unviable to file for bankruptcy in the US, yet they still went forward with it. Although the event specifics smell very fishy, there’s no shortage of SBF’s strong ties across the industry, politics, and media. While a class-action lawsuit was filed against him including NFL quarterback Tom Brady, comedian Larry David, tennis player Naomi Osaka, and NBA team the Golden State Warriors, for false promotion of FTX yield-bearing accounts (YBAs), FTX seems to have a lot of influence and networks in place. This can control the contagion for the time being, but the aftermath for the broader industry is extremely tough in the near future.
One of the first to feel this heat soon will be the other leading actor in last week’s FTX drama – Changpeng Zhao (CZ). The US congress has announced the investigation of Binance’s role in FTX’s collapse and the hearing for the same will be held in December. Historically, December has been the worst month for BTC and crypto, so any substantial misconduct being found during the trials will further capitulate the market to lower depths. Conversely, it can have neutralizing effects too
While Binance’s future is still on hold, many firms that are yet to capitulate due to connections with FTX and Alameda are yet to become totally public. Stay tuned for a deep dive on our research website kunjiresearch.com. One of the other giants with a high probability of falling is Genesis trading. Being a part of the broader Digital Currency Group (DCG) poses a huge risk to the group’s reputation, with more than 600K BTC in its reserve, grayscale trust is another institutional behemoth that can face severe lashes if Genesis implodes drastically. The same can take the GBTC premium to new lows and radically affect the actual BTC and crypto prices.
FTX’s cloud - DEFI’s silver lining
A high drop in trust in CEX’s (centralized exchanges) has led to a sharp decline in total reserves on CEXs. This caused a huge push to DEX volumes to the upside, along with total fees generated for the protocol and DEXs. DEXs like dYdX provide the nearest features to CEX yet maintain a good amount of decentralization. Self-sovereignty of one’s asset is one of the primal ethos and benefits of blockchain and platforms like dYdX emulate the same values. During the entire FTX fiasco, if users had used dYdX in place of other centralized exchanges, the only issue they might have encountered would have been the higher fees that the DEXs are still trying to figure out an excellent solution. The higher usage translates to immediate price appreciation for the token as well. Time and time again, decentralized products like DEX have proved the strength of blockchain’s immutability and robustness.
The Digital Dollar Rises
The Digital Dollar system that financial censorship activists highly fear has finally started its pilot in the US. Along with payments juggernaut Mastercard (MA), participating institutions include Citigroup (C), HSBC (HSBC), BNY Mellon (BK), and Wells Fargo (WFC). The 12-week proof-of-concept pilot program will investigate the use of this platform. While only simulated data will be used in the project’s test environment, real-world implications when the same is implemented for retail can be polarizing, and they can be a huge mover for the socioeconomic standing of US citizens.
Good Political Surprise
A significant immediate mover of social change in the US was the midterm elections; as GOP captured the house successfully, their loss of the senate was a big surprise for political pundits. Democrats changed the strategy of launching candidates with no short of the limelight as that of influencers has played in the senate.
A highly divided outlook for all political decisions should be expected for the near-to-distant future, with a moderate majority of sanity taking over politics and voter sentiment, at least for the time being. All this will ease the broader investment scenario and risk on assets like BTC if not further fueling their drops.
Bitcoin returns were 5.3% for this week. The Alpha Blue Chip Focused Strategy returns were 5.75% during the same period (10 NOV – 17 NOV). The Top Cap Digital Assets Strategy and Arbitrage and Balanced Opportunities Strategy returns were 7.32% and 5.77%, respectively.