Important disclaimer: none of Hashdex’s products have any exposure to Alameda Research, FTX, or the FTT token. We do not store any crypto asset on exchanges and only use segregated cold storage accounts with regulated custodians that meet the highest oversight, auditing, and security standards.
The Nasdaq Crypto Index (NCI) closed Sunday (11/13/22) 22.6% below last week’s closing. The index’s negative performance was influenced by ether (ETH), down 23.8%, while bitcoin (BTC) fell 22%.
Coming out of a week where Powell seemed to vaguely signal that the worst of the Fed rate hikes may be in the rearview mirror, investors shifted their focus to the midterm elections while they awaited the release of CPI results.
On Sunday (11/06) afternoon, Binance’s CEO Changpeng “CZ” Zhao published a tweet announcing his exchange’s intent to “liquidate any remaining FTT” on its books. CZ’s tweet was a reaction to a Coindesk report that showed that Alameda, a trading firm, had a balance sheet filled with FTT tokens, a token native to the FTX exchange.
Both Alameda and FTX were founded and led by one of crypto’s most visible characters, Sam Bankman-Fried, aka SBF. In other words, Alameda’s liabilities were backed by their founder’s own illiquid exchange token. This dubious maneuver may have been how SBF managed to keep Alameda from going the way of Celsius, Voyager and 3AC in the wake of the Collapse of the UST (Terra-Luna) ecosystem in May.
Initially, the impact of CZ’s tweet was mostly limited to FTX’s own token and Solana (SOL), both of which started trending down on Sunday afternoon. Alameda was one of the many private investment firms that participated in SOL’s initial coin offering (ICO) in 202. Investors grew increasingly worried that Alameda would dump the SOL on their balance sheet in an attempt to remain liquid.
Despite the concerning headlines, both BTC and ETH remained mostly stable on Monday. BTC registered its weekly high of $20,927 right as the week began (Monday 00:01 EST), while ETH would hit its high water mark of $1,606 for the week later in the afternoon. Alameda’s CEO Caroline Ellison offered to purchase Binance’s entire FTT allocation around midday on Monday, but CZ rejected the over-the-counter offer to purchase the tokens in the afternoon.
Just as Monday was about to give way to Tuesday, markets began reacting to news that FTX had suspended client withdrawals, leading BTC and ETH to shed about $1,000 and $100, respectively. Prices would then stabilize until midday on Tuesday when CZ published a tweet divulging the fact that Binance has signed a “non-binding LOI (letter of intent), intending to fully acquire FTX.” The crypto market rebounded as investors became hopeful the takeover could stem the contagion of FTX’s insolvency.
However, almost immediately after the tweet, speculation around whether Bianance would follow through on their LOI began to consume investors. By late Tuesday afternoon, BTC and ETH prices had dropped by 11% and 16%, respectively, since CZ first divulged the LOI.
After moving sideways on Tuesday night and Wednesday morning, reports that Binance would forgo the opportunity to buy one of its largest rivals sent prices plummeting once again. By late Wednesday night, BTC and ETH prices dipped below $16,000 and $1,100, respectively, to reach their weekly lows. BTC hadn't sunk down below that threshold in over two years.
Prices began a slight recovery late into the night, to then dip right as October’s consumer price Index (CPI) was due to be released. The index showed that prices rose 0.4% for the month and 7.7% on a twelve month basis. Both figures came in 0.2% below expectations, making October the slowest month for US inflation since January.
The surprisingly cool CPI reading lifted BTC’s price by $1,000, as ETH followed suit with its own $100 surge. While crypto investors were happy to welcome good news after the disastrous start to the week, FTX’s meltdown may have deprived markets of what could have easily been the best day for crypto assets in 2022.
The S&P 500 surged 5.54% (best since 04/2020), while the Nasdaq Composite soared 7.35% (best since 03/2020), in what Bloomberg called the “best post-CPI day on record.” October’s inflation reading seems to have cemented the notion that the worst of the FOMC’s most aggressive rate hike cycle since the early 80’s is squarely in the rearview mirror. Too bad crypto investors were consumed by contagion fears to show up to the party.
From Thursday afternoon to Friday afternoon, prices slowly dipped on choppy trading until BTC settled just below the $17,000, before treading down as the week drew to a close. Also on Friday, FTX published a press release informing investors that the exchange had filed for Chapter 11 bankruptcy protection in the U.S and that Sam Bankman-Fried had stepped down as its CEO.
Investors will be on the lookout for news that helps gauge the extent of the impact of FTX’s meltdown on the greater crypto market. It’s still not entirely clear what market entities have been compromised by exposure to the FTT token and whose money is locked behind FTX’s withdrawal freeze. Citibank analyst Joseph Ayoub told CNBC on Friday “there's a serious risk of broader contagion… but it’s unclear as to how far and how deep this goes”, adding that it could take “a long time to resolve.”
Midterm elections and the future of crypto regulations
Republicans fell short of their expected red wave, but crypto has allies on both sides of the isles. FTX founder Sam Bankman-Fried (SBF) was the second largest donor to the democratic party, behind only George Soros. FTX’s public meltdown should increase pressure on US legislators to take action on crypto regulation.
Sen. Agriculture Committee Chair Debbie Stabenow (D-MI) published a tweet last Thursday citing “the urgent need for greater federal oversight of this (crypto) industry.” Senator Stabenow is one of the sponsors of the Digital Commodities Consumer Protection Act (DCCPA), a bill that seeks to give the Commodity Futures Trading Commission (CFTC) power to regulate cryptocurrencies. The bill, however, could be met with renewed resistance due the fact that SBF was one of its most vocal advocates.
Congress will reconvene today, but the four scheduled working weeks left in 2022 should be consumed by non-crypto priorities. Crypto regulation will likely have to wait until the new Congress goes to work in January. Until then, concerns highlighted by FTX’s debacle—like the mixing of customer and exchange funds and the lack of lender of last resort in crypto markets— are likely to remain hotly debated issues.
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