The stunning downfall of FTX could lead to Bitcoin dropping another 25 per cent, a major US investment bank is predicting.
Wall Street JPMorgan said the rattled crypto sector is facing “a new cascade of margin calls” which will have a major impact on the value of Bitcoin, already down about 75 per cent in the past year.
At 9.30am AEST, Bitcoin was trading at US $16,400 ($24,560), down from just over $21,000 after a turbulent, market-rocking seven days.
Cryptocurrency insiders are debating whether to call the implosion of FTX, which filed for bankruptcy last week, a “Lehman moment,” referring to the 2008 collapse of the investment bank that sent shockwaves around the world.
Many think it’s an apt comparison.
“What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem,” JPMorgan analysts wrote in a market note.
“Given the size and interlinkages of both FTX and Alameda Research with other entities of the crypto ecosystem including DeFi platforms it looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting similar to what we saw last May/June following the collapse of Terra.”
A margin call is when the value of securities in a brokerage account falls below a certain level, requiring an injection of more funds.
Margin calls only happen in accounts that have borrowed money to purchase securities, and they usually occur in fast-declining markets.
The failure of FTX, which was launched in 2019 by Sam Bankman-Fried, a 30-year-old wunderkind, has spooked crypto investors.
“Everyone’s a little bit in shock,” said Shan Jun Fok, co-founder of Moonvault Partners, a crypto investment firm based in Hong Kong.
“A lot of people trusted FTX as the gold standard.”
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He compared the collapse of FTX to Enron, the 2001 corporate fraud scandal that resulted in the surprise bankruptcy of the US energy company.
JPMorgan said the FTX saga would likely “increase investor and regulatory pressure” on the sector.
The demise of FTX could produce other casualties.
It’s hard to know at this point who is exposed, though there are clear ripple effects.
Despite its reputation as a dependable, low-risk investment portal, FTX’s business appears to have been built on a complex, extremely risky kind of leveraged trading.
Customers deposited their money to engage in crypto trading.
But it appears that FTX instead took billions of dollars worth of that money and loaned it out to its sister firm, Alameda, to fund those high-risk bets, according to The Wall Street Journal.
At the end of the day, FTX experienced the crypto equivalent of a classic bank run. Customers wanted their money out, and FTX didn’t have it.
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