For those who don't know, FTX is (still) an Exchange of digital assets and derivatives. Until three weeks ago it was the fourth largest in the world, with renowned investors and public figures such as Kevin O'Leary, also known as “Mr. Wonderful” which is how he became famous on the television show Shark Tank.
Why is this event important? Let's do it by steps.
FTX declared bankruptcy on November 11th. On November 9th, CEO Sam Bankman-Fried announced that he needed more cash to avoid bankruptcy, in an attempt to persuade investors to inject liquidity.
Until three weeks ago it was the fourth largest exchange for digital assets and their derivatives, with a colossal size of 32 billion US Dollars ($32 billion USD).
Before its fall, it sought to cover a hole in its $8 billion USD balance sheet, with the colossal competitor Binance (which is the largest in the world when it comes to assets traded daily) even starting diligence for a possible acquisition of FTX but which ended early during the “Due Diligence” period (which is when they review the company from A to Z) for undisclosed reasons.
Traditional financial giants such as BlackRock, Sequoia Capital, Tiger Global and Lux Capital are invested in FTX and are therefore exposed to it.
Sequoia Capital has already announced that it valued its investment in FTX at around $0 Million USD at $200 USD. Total loss.
BlackRock manages an asset portfolio (the largest worldwide) in the order of $10 trillion USD, however it did not disclose how much it had invested in FTX.
In addition, there are between $1 billion USD and $2 billion USD of customer funds that have disappeared from the Exchange. They simply disappeared, so investigations are ongoing to find out what happened.
What consequences can we expect in the short term?
In situations of declared bankruptcy, what any person or company intends to do is liquidate their investments.
However, they are not always able to recover all the amounts, so the next logical move is to liquidate other assets in an attempt to cover the hole left by money lost in the investment (in this case the bankruptcy of FTX).
This sell-off movement is promoted by a sell sentiment. When we have a lot of volume of whatever it is being sold within the same period of time, prices go down, quotations go down, entering a recessive spiral.
In the digital asset markets, there is a dark climate, with Bitcoin already devalued in the last 30 days by around 19,31%: on Friday, November 4th, it traded at $21 USD and, on Wednesday the 179,09th, which was precisely when everything started to fall apart, Bitcoin closed at $9 15 USD.
That is, the bulk of the devaluation of the last 30 days happened at the moment that marked the beginning of the fall of the FTX.
Now, with international giants like BlackRock, as well as even the traditional banking system, are exposed to this bankruptcy, the feeling that is generated is one of mistrust and uncertainty, given that we are talking about giants that, when they move, set prices and market trends, due to its enormous size and volumes transacted in the markets.
This means that this crisis in the digital asset system can and will spill over into traditional markets.
We'll have to wait and see how big it is, as this is something new and there is no historical data to try to understand without doing futurology.
Will digital assets disappear?
They won't disappear. This is an event that I am convinced will serve as a catalyst for the international market and will accelerate the regulation of the system, in the sense of implementing control and supervision measures to prevent companies linked to this world from becoming over-leveraged, as happened with the banking system in 2008.
Measures will be implemented to avoid catastrophes, which will give the market and investors more confidence to boost the development of digital assets.
For investors in digital assets, the watchword is attention, limiting exposure, for now, to digital assets and waiting for the market to reach the inflection point that marks the effective “sales season”, and, in turn, the reversal of the trend.
We are experiencing a tense climate at the moment, however I am extremely optimistic for the future. Come the balances!
Author Luis da Ponte is an effective member of the Order of Economists.
He has a degree in Business Management and a postgraduate degree in Corporate Finance from the University of Algarve and a degree in Public Administration from the University of Minho.
Professionally, he is the owner of the companies “VDP – Consultoria | Insurance” and “TSE Industrial”.
Note: article published under the protocol between the Sul Informação and the Algarve Delegation of the Order of Economists