The crypto industry is plunged into a new crisis of confidence.
As cryptocurrency prices began to stabilize, fresh drama derailed the sense of relief that was finally settling into the crypto market this year.
The consequences and implications of this drama are still far from being established as the shock is colossal.
Sam Bankman-Fried, who emerged this summer as the savior of crypto firms on the verge of bankruptcy, agreed within 24 hours to sell his empire to his great rival Changpeng Zhao.
This empire is made up of the FTX.com exchange, two of whose ambassadors are sports stars Stephen Curry and Tom Brady. There is also the high frequency trading platform Alameda Research. Financial details of the transaction were not disclosed.
But this transaction which is more of a bailout as Zhao indicated that FTX and Alameda were on the verge of insolvency.
"This afternoon, FTX asked for our help," Zhao, co-Founder and CEO of Binance, wrote on Nov. 8. "There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days," he added.
If Bankman-Fried, which extended lines of credit to fintech BlockFi and took a stake in popular trading app Robinhood (HOOD) at the height of the credit crunch last summer, who is safe or immune to a liquidity crunch?
It is this question which was widely spread on Nov. 9. Investors seem to be wondering what corpses the crypto industry still has in its closets. Their defiance is materialized by the fall in the prices of cryptocurrencies.
Risk of Contagion
The crypto market was down 12.3% in 24 hours. The market was now valued at $887 billion. It has thus fallen by more than $2.1 trillion compared to its record level of $3 trillion reached in November 2021. In one year, the situation has completely deteriorated.
The price of bitcoin (BTC) fell 16.6% to $17,188.00, according to data firm CoinGecko. The most popular cryptocurrency seems to be on the way to pushing new thresholds down. BTC has now lost 75.4% of its value since its all-time high of $69,044.77 reached on November 10, 2021.
The prices of ether (ETH), the second currency by market value, fell by 24.3% at $1,184.53. ETH is down 76.1% from its Nov. 10, 2021, all-time high of $4,878.26.
Cryptocurrencies linked to decentralized finance (DeFi) projects were on the rise. Solana (SOL) lost 42.7% over the last 24 hours, Cardano (ADA) fell 13.6%, Polkadot (DOT) fell 12.5%.
Meme coins Dogecoin (DOGE) and Shiba INU (SHIB) lost 21.4% and 15% respectively.
Perception seems to have changed on the crypto industry. Many pundits and industry sources believed that Bankman-Fried and his empire were the most financially sound players. The fact that they find themselves short of cash is a blow that is likely to leave indelible marks on the crypto sector for many years to come.
There are also questions about the deal with Zhao and his company Binance, the world's largest cryptocurrency and digital asset exchange.
"There is sufficient reason to believe the risk of further contagion remains due to defaults on loans to Alameda," said FS Insight head of Digital Asset Strategy Sean Farrell. "From a strategy perspective, we think it is wise to reduce exposure to Solana ($SOL) in the near term."
He added that: "Further, given the current unknowns, it may be prudent to raise some cash in the event of additional drawdowns across other major cryptoassets."
