The past few days have been particularly brutal for crypto investors, with more than US$230 billion being wiped from crypto markets across the board in the last 24 hours alone.
According to data from TradingView, the total market value of cryptocurrency has plunged from US$974 billion this time yesterday to just US$736 billion at the time of writing.
The price of Bitcoin (BTC) is down 15% for the day and is currently hovering around the US$16,000 mark, its lowest point since November 2020. This downward price action is being driven by an ongoing saga between the world’s largest crypto exchange Binance and its (former) competitor FTX.
Crypto investors had evidently pinned their hopes on the market stabilising if Binance went through with its plan to acquire FTX, but following a sudden backflip on the decision, Bitcoin and altcoin prices have plunged at a phenomenal rate.
Ethereum and altcoins follow suit
The second largest cryptocurrency by market capitalisation, Ethereum (ETH) seems determined to follow Bitcoin deeper into the red, currently down an eye-watering 30% over the last 7 days. ETH is currently changing hands for US$1,130 apiece, its lowest point since June this year.
While Ethereum’s weekly price action may seem particularly rugged, it pales in comparison to the drops witnessed by Solana (SOL) which is currently down more than 40% in the past 24 hours. By far the biggest loser in the turmoil has been the native token of beleaguered crypto exchange FTX which now looks to be facing a full-blown insolvency crisis.
The FTT token is down nearly 90% for the week, changing hands for just US$2.37, a pretty far cry from the US$25 price tag it commanded on Sunday.
Why are crypto markets down? The FTX drama explained
Much of the recent market turmoil can be traced back to a feud between two of the largest figures in crypto that kicked off earlier in the week. What started off as two CEO’s trading blows on Twitter rapidly devolved into a market-wide liquidity crisis, with the world’s fourth largest crypto exchange FTX now facing insolvency.
The drama began when a report surfaced on Thursday last week, showing that the financial health of FTX may be more unstable than most investors thought. The report showed that FTX may have been falsely inflating its value by printing billions worth of its native FTT token essentially out of thin air.
Binance owned a massive amount of FTT which it received from a strategic investment back in 2019. On Sunday, CZ said that he saw the FTT tokens as a “significant risk” to the health of Binance and announced that he would begin selling US$548 million worth of FTT.
While CZ claimed that Binance would try to “minimise the impact on markets” when selling, markets definitely felt a considerable impact. When Binance sold the FTT tokens, CZ spooked the market by creating a ‘bank run’ with FTX customers rushing to withdraw their funds from the exchange. Reports indicate that clients withdrew more than US$1.2 billion from FTX on Monday alone.
Bank run
The bank run caused the value of FTT to drop so much that FTX was forced to request financial aid. On Tuesday, CZ said he would acquire FTX pending a closer look at the firm’s finances. After inspecting FTX’s books, Binance announced that it would not acquire FTX. Now, the CEO of FTX Sam Bankman-Fried (SBF) is rushing to secure outside financial aid, with the Wall Street Journal reporting that there may be a US$8 billion dollar hole in the company’s finances.
All in all, the financial contagion has spread from FTX into the broader market, sending the price of crypto assets plummeting. Investors fear continued fallout from other major players that may be exposed to FTX shoddy finances.
Election uncertainty may also be spooking investors
While the fallout from FTX is the clear driver of market turmoil, uncertainty around the recent mid-term elections in the US may also be fuelling crypto paranoia. While investors broadly expected a “red wave” that would see Republicans take over both the House and the Senate, the final outcome remains uncertain.
However, according to the most recent projections, Republicans appear set to win control of the House while the Senate is leaning toward the Democrats. This ongoing uncertainty caused the stock market to see red for the first time this week, with the tech-dominated Nasdaq and S&P 500 dipping 2.4% and 2%, respectively.
You ok Solana?
Another important factor at work is the wave of liquidations unravelling throughout Solana’s decentralised finance (DeFi) markets. Solana was one of the major assets on the balance sheet of FTX and Alameda Research. Earlier today, cryptocurrency exchange Crypto.com emailed its users to inform them that a wide array of Solana-based deposits had been halted.
Can crypto markets recover?
Unfortunately, the market-wide sell off doesn’t look like it’ll be finishing up any time soon. Speaking to The Chainsaw, Carlos Gomez, the Chief Investment Officer at Belobaba Crypto Asset Fund said that it’s unlikely crypto will recover in any meaningful way in the short term.
“The broad distrust in the crypto markets is going to hurt prices in general over the next few days.”
Carlos Gomez, CIO of Belobaba
“Solana is the main Layer 1 token that’s going to suffer the most. I think that Bitcoin (BTC) in one hand and Ethereum (ETH), Polygon (MATIC) and Polkadot (DOT) in the other — are the cryptocurrencies that will rebound first,” he explained.
“Bitcoin will recover first because of its independence and decentralisation and the other three because they’re the protocols that will absorb much of the activity that is currently being undertaken in Solana,” Gomez added.
Because of the way that FTX’s finances were handled, Gomez said that investors should avoid pinning any of their hopes on FTT witnessing a recovery any time soon.
“Today, the intrinsic value of FTT is zero,” he concluded.
