Moneycontrol Pro Panorama | Fault lines are running deep in crypto world

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The Crypto world has been shaken again, but this time around, the fragility of the crypto ecosystem is thoroughly exposed.

Tremors were felt on Sunday when Binance CEO Changpeng 'CZ' Zhao tweeted that Binance would dump their entire holdings in the cryptocurrency exchange FTX. The FTX cryptocurrency token lost 40 percent in value in 24 hours, causing a rout across crypto markets as contagion fears spread.

Crypto investors fear another meltdown similar to that which crashed crypto hedge fund Three Arrows Capital in July.

Ironically, within days of causing a run on the exchange, CZ tweeted: "This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding letter of intent (LOI), intending to fully acquire FTX.com and help cover the liquidity crunch. We will be conducting a full due diligence (DD) in the coming days."

Call it a shrewd business acquisition or fragility in the crypto space, one tweet was enough to shake the environment. Earlier, Elon Musk used to move the crypto markets with his tweets, but those never resulted in an acquisition. CZ managed to acquire a competitor, the fifth largest in the space, for a fraction of the cost.

The tweet also resulted in a loss of $50 billion in the market value of cryptocurrencies. According to coinmarketcap.com, the combined crypto market cap fell by over 5 percent in the last 24 hours to $965 billion — below the psychological $1 trillion level.

A cause for concern is that CZ caused a run on a relatively stronger crypto exchange which is the third largest in the world in terms of volume.

The crash is linked to crypto-billionaire Sam Bankman-Fried's FTX exchange and his trading firm Alameda Research.

Recent media reports said Bankman-Fried's trading firm Alameda Research is overexposed to the FTT token that has seen a sharp fall. It also mentioned that the FTX exchange was on the verge of insolvency.

Countering the report, Bankman-Fried in a series of tweets said, “FTX is fine. Assets are fine. It’s heavily regulated, even when that slows us down. We have GAAP audits, with > $1b excess cash. We have a long history of safeguarding client assets, and that remains true today.”

FTX was considered the JP Morgan of the crypto world for its efforts in bailing out crypto firms in the wake of the Terra/Luna crash with credit lines and bailouts. Bankman-Fried bailed out struggling brokerage firm Voyager Digital with a $70 million line of credit.

However, CZ's reason for liquidating his FTT holding was that he fears the token might collapse in the same manner as Terra/Luna, which plummeted to near zero in May.

Irrespective of the boardroom games, the crypto world has shown that it’s vulnerable. All claims of it being a safe haven or digital gold no longer have any takers. The CZ-FTX episode highlights the level of mistrust in the space even among the top players.

With most governments questioning and creating hurdles for cryptocurrencies, it will be a long time before this alternative asset class regains confidence, if it ever does. ​
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Shishir AsthanaMoneycontrol Pro