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Dec 2022

BlockFi files for bankruptcy and Powell all but cements smaller rate hike

by Hashdex Research
2 min read
Dec 05, 2022

BlockFi files for bankruptcy and Powell all but cements smaller rate hike

The Nasdaq Crypto Index (NCI) closed Sunday (12/04/22) 4.0% above last week’s closing. The index’s positive performance was influenced by ether (ETH), up 5.5%, while bitcoin (BTC) rose 3.3%.

Coming out of a week where Genesis Global Capital’s struggled to raise the funds needed to stave off bankruptcy, investors prepared for more negative FTX fallout headlines while simultaneously keeping an eye on the macro as 2022’s final Federal Open Market Committee (FOMC) rate announcement (12/14) grew closer.

After a selloff on Sunday night, crypto assets traded mostly flat on Monday. Digital asset prices only moved slightly despite news that BlockFi, a high-yield centralized crypto lending platform, had filed for bankruptcy. A few hours after the press divulged the filling, BTC and ETH sunk into their respective weekly lows of $16,143 and $1,163.  

BlockFi has had a rough year, so its Chapter 11 filing wasn't much of a surprise. Back in February, its subsidiary, BlockFi Lending, was penalized by the SEC with a $100 million penalty for not complying with US securities laws. Later in June, rumors began to swirl that BlockFi had become insolvent due to its exposure to Three Arrows Capital (3AC), a crypto hedge fund that fell victim to the Terra/LUNA collapse. 

A few days later, FTX offered the crypto lender a $400 million revolving credit line that gave the exchange the option to eventually purchase BlockFi. FTX’s collapse in early November forced the beleaguered crypto lender to freeze withdrawals and, eventually, declare bankruptcy. 

According to an FAQ posted on their site, BlockFi had “...significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.”

Before Monday gave way to Tuesday, crypto asset prices began recovering. Then, around the time markets closed in the US, prices began surging. By midnight on Tuesday, BTC had registered a $700 dollar recovery.

On Wednesday, prices dipped then traded flat until midafternoon on the East Coast, when a surprising inflation reading coming out of the eurozone showed price increases had slowed down for the first time in 17 months. Consumer prices grew by 10.0% on a twelve month basis in November, slowing down from a 10.6% increase in October. 

Europe still faces major hurdles, not the least of which is a war that is still exerting massive pressure over energy prices. Despite these ongoing challenges, investors interpreted the slowdown in the pace of inflation as a sign that the European Central Bank’s (ECB) current cycle of rate hikes may be less intense and come to an end sooner than previously expected. 

Later in the afternoon, prices were also benefited by Fed Chairman Jerome Powell’s admission that it “makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” adding that “The time for moderating the pace of rate increases may come as soon as the December meeting.” ETH registered its weekly high of $1,301 briefly after Powell’s comments at the Hutchins Center on Fiscal and Monetary Policy. 

On Thursday, another inflation reading—this time coming from the US–also signaled a shift towards price stability. November’s personal consumption expenditures price index rose 0.2% in October, coming in slightly below expectations. October’s reading also showed that US inflation had waned on a twelve-month basis (5.0%) in comparison to September’s 5.2% figure.

Despite the positive news, prices remained stable that day. Investors were either tapped out on macro optimism after Powell essentially cemented the fact that a smaller rate increase would be announced in two weeks time or were reacting to the mixed signals provided by US jobless claims (divulged on the same day) that showed that a stronger-than-expected job market would continue to push prices in the opposite direction.

Digital asset prices would move sideways on Friday and into the weekend. On Sunday afternoon, prices regained their upward momentum as BTC registered its weekly high of $17,263.

 

Looking ahead 

 

After a bevy of positive macro news, investors expect the FOMC to announce a 50 bps rate hike on the Wednesday after next, so not much should move the needle on the macro front this week. Beyond the macro environment, investors will continue to monitor FTX contagion developments.

 

Sam Bankman-Fried breaks his silence

Sam Bankman-Fried (SBF) took part in a surprising media tour last week despite the fact that he may face criminal charges for his role in FTX’s meltdown as CEO. In a New York Times interview, SBF admitted he “made a lot of mistakes,” but insisted he “did not ever try to commit fraud on anyone.”

SBF also denied accusations that he had purposely commingled FTX customer funds with Alameda’s risky bets, portraying the trading firm as just another counterparty of the exchange. “Most of the firms had borrows on FTX. The problem here, this one (Alameda’s), was this was too big. I was surprised by the size of what it was” stated the former CEO. SBF also claimed that FTX US, the US arm of the exchange, remained “fully solvent” and that he believed “withdrawals could be opened up today.” 

Additionally, SBF seems to believe that FTX’s situation could still be salvageable, suggesting there was still “a lot of interest in financing, a lot of fairly strong interest. Billions of dollars worth.” He admitted that, after the bankruptcy filing, the exchange's fate was “not in my hands at this point,” but still believed “customers could end up being made a lot more whole or maybe even fully whole if there was a really strong concerted effort (to seek financing).”   

 

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