The crypto market is flashing red. Most coins are showing double-digit losses, and the total crypto market capitalisation has plummeted to $781 billion, its lowest point since Dec 2020, according to data from Trading View. The crash has undoubtedly caused a lot of pain for investors and has also resulted in widespread panic. But what has caused this downward spiral, which projects have been hit the hardest, and where does the crypto industry go from here?
Find out as we answer some critical questions about the latest crypto market crash.
What caused the crash?
The main reason for the market downturn is the crash of FTX, one of the largest global crypto exchanges. It was business as usual for the platform until CoinDesk published an article that raised questions about FTX's financial health. Soon, rumours of insolvency began to do the rounds, causing widespread panic among investors.
This triggered a massive sell-off as investors began withdrawing their funds from the platform. At the same time, rival crypto exchange, Binance, announced that it would be offloading all its FTT holdings, which were worth a whopping $500 million. FTT is the native token of the FTX exchange. These factors combined sent FTT tumbling. The token dropped from $22.79 late on Nov 7 to around $15.04 by midday on Nov 8. FTT's plummeting valuation also had a tradeoff effect on the rest of the market, putting most coins in the red.
Things then took a turn for the worse after Binance announced its plans to purchase FTX. Following the announcement, FTT nosedived from $19.01 late on Nov 8 to $3.59 early on Nov 9. Fortunately, news of the Binance takeover eventually helped soothe investor nerves, as FTT showed signs of recovery, climbing to the $5 range a couple of hours later.
However, in a surprising turn of events, Binance backed out of the deal last night, and FTT fell through the roof. It is currently trading at $2.25, which is 90 percent lower than the same time last week. The FTX crash bears scary similarities with the Terra meltdown in May, which also sent the markets tumbling at the time. It's a similar case right now, with most of the coins in the top 100 flashing red and some even registering double-digit losses.
Which projects are the hardest hit?
While the entire crypto market is feeling the heat from the FTX crash, some projects are faring worse than others. For instance, Solana, often referred to as an Ethereum killer, has registered 32 percent losses in the last 24 hours, second only to FTT. Sam Bankman-Fried (SBF), the founder of FTX, was an early investor in Solana, which could explain why Solana was in free fall over the last 24 hours.
As such, most cryptocurrencies exposed to SBF's companies have been hit hard by the fallout. For instance, Serum (SRM), a decentralised exchange asset, crashed by 55 percent in the same period. REN, a cross-chain crypto custodian service that joined forces with Alameda, another one of SBF's firms, has also been spiraling out of control. The project registered a 33 percent drop after Binance pulled out of the FTX deal. Similarly, other tokens backed by SBF, such as Bonfida (FIDA), Raydium (RAY) and Maps (MAPS), have fallen by an average of 40 percent since Nov 6.
The two biggest cryptocurrencies by market capitalisation, Bitcoin and Ethereum, are also reeling from the FTX crash. Bitcoin registered a new low for the year after briefly touching $15,711 early this morning. It's a similar story for Ethereum, which has dropped nearly 10 percent in the last 24 hours and is down almost 24 percent for the week.
What are experts saying?
The FTX crash reminds us that even the biggest players can fail, and the bigger they are, the harder they fall. Also, crashes like this put a massive dent in investor confidence as they affect the entire market. Moreover, this is the second such event this year.
"Given the public-facing nature of FTX CEO Sam Bankman-Fried and the size of FTX, we believe that the week's events could cause some loss of consumer confidence in the crypto industry, beyond that seen in the aftermath of the 3AC, Celsius, and Voyager events that took place earlier this year," said an analyst note from KBW, an NYC-based investment banking firm.
However, Binance backing out of the deal could create a domino effect that could cause even more pain for the crypto market. First off, FTX may be forced to declare bankruptcy if it does not receive a quick cash injection, according to an article by Bloomberg. If this happens, it could affect several firms that have funds invested in FTX.
"This is a worrying development for the industry already in the middle of a bear market. The general feeling was that we had hit bottom, and the only way was up. Now the market has to deal with this new unknown," said Punit Agarwal, COO, and founder of KoinX, in a press note. Amanjot Malhotra, head of Bitay India, voiced similar concerns. "We can see a lot of other companies and projects liquidating or declaring bankruptcy," said Malhotra, predicting a snowball effect of liquidations after the FTX crash.
The worst part is that investor confidence is at an all-time low and finding funds to plug FTX's financial gaps will prove extremely difficult. "Now that the balance sheet strength of FTX is under question only a few months after being perceived as a strong balance sheet entity, it creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue," said analysts at JP Morgan.
When will markets recover?
The FTX crash is a very recent development, and the road ahead looks long and arduous. "The dagger will continue to hang over the crypto market, as long as the outlook of FTX's fate remains unclear," said Lennix Lai, director of financial markets at OKX. Sam Kopelman, UK manager at global cryptocurrency exchange, Luno, echoed this sentiment, saying, "Long-term fearful sentiment in the market means that investor momentum will take a while to pick back up."
However, crypto prices are cyclical and generally tend to recover from such crashes. "History shows that crypto does tend to recover after a sustained dip, and investors have certainly not lost interest," says Kopelman. But, as mentioned above, the community confidence in the crypto market is at its all-time low, and this could be a major factor in the recovery of the digital asset industry. "Ultimately, confidence and regulatory clarity is key to crypto adoption and its resurgence," Kopelman added.
However, in the long run, the FTX crash should be just a bump in the road for cryptocurrencies. The digital asset industry is seeing mass adoption and should eventually rise above prevailing conditions. "In 2023, we expect to see a growing number of financial institutions accept cryptocurrency as a form of payment," said Nick Root, CEO of Intergiro, a platform that offers multi-currency bank accounts across Europe. "With huge firms such as Google jumping on board, in 2023, we predict more banks and financial providers will join them," Root added.
Conclusion
At the end of the day, the most important question is, what should investors do? Most experts would suggest staying calm and HODLing on. Another good tip would be to withdraw funds from online wallets and store them offline. If FTX does declare insolvency, it could trigger several other bankruptcies. Retrieving funds from crypto firms battling bankruptcy proceedings can be a long and challenging process, as seen in the Voyager and Celsius court proceedings.
Some experts are also predicting further drops. Therefore, the best thing to do right now would be to stay calm, assess the situation and exercise due diligence before making any money moves. If historical data is to be believed, crypto markets are cyclical and should recover from the current market conditions.
(Edited by : Asmita Pant)
