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Moneycontrol Pro Panorama | FTX bankruptcy — Investors show symptoms of fear psychosis

In today’s edition of Moneycontrol Pro Panorama: Crude oil plays party pooper, a buyback may relieve IEX investors, China’s steel output comes at wrong moment, and more

November 23, 2022 / 02:58 PM IST
Representative image

Representative image

Dear Reader, 

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

The collapse of FTX, a crash in digital cryptocurrencies and fresh doses of daily negative news are spreading fears of a crypto contagion in financial markets. And, the fear is real as one of the world’s largest exchanges, FTX, has filed for bankruptcy. Not surprisingly, cryptocurrencies have tumbled. The value erosion so far in 2022 is estimated at $1.4 billion. There’s speculation over other big crypto names going under too unless they are able to raise millions of dollars to support redemptions.

Worse, FTX owes its top 50 creditors -- the list is not disclosed -- around $3.1 billion, according to media reports. Apart from the billions of dollars at stake, it has precipitated issues such as lack of transparency, trust and challenges in regulation.

As critics sit back and watch the debacle playing out, those who fell for the bait of rapid, sky-high returns can bid goodbye to their monies. Having seen their crypto holdings erode in value, investors who have burnt their fingers could become wary of investing in riskier asset classes, including equities.

In a 30-page bankruptcy filing, the newly appointed acting CEO, John J. Ray III, who also oversaw the Enron bankruptcy expressed his shock at the extent of problem in FTX. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented,” he wrote.

However, some believe that with institutional investors acting quickly to write off losses, the FTX collapse is unlikely to spread beyond cryptos.

To be sure, the crash has sparked debates on the need for regulating crypto markets. But is that a wise approach? The FT article Do not regulate cryptos as finance (free to read for MCPro subscribers) is insightful. While some believe it is time to tighten regulations for fear of a contagion, others believe that intervention would give undeserved legitimacy to a system that does little to support real economic activity.

Amid all the chaos, FTX’s ex-CEO Bankman-Fried who stepped down could only do as much to write an apology letter to employees. Among the other things, he mentioned that the company had around $60 billion in collateral and $2 billion in liabilities this spring, but a market crash meant the collateral's value halved.

The jury is still out on how this will end. Regulators are grappling with an unknown virtual world to book culprits. Of course, like all other big scams and meltdowns, be it Lehman or Enron, financial systems do make a comeback even if they are shaken by the aftermath in the near term.

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Crude oil can spoil the equity market party in December

Chart of the Day | China’s steel output growth comes at inopportune moment

For IEX investors, a buyback may provide limited relief

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Private sector can boost ISRO's space growth story

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Technical Picks: IndusInd BankGold BeesJSW SteelNMDC, and Aluminium (These are published every trading day before markets open and can be read on the app).

Vatsala KamatMoneycontrol Pro

Vatsala Kamat