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How Far Can the FTX Contagion Spread?

The FTX fallout continues to reap its contagion toll. Gemini’s Earn program halted all withdrawals on Wednesday, much like BlockFi last Friday. It appears that the FTX collapse triggered a double pressure – the direct FTX exposure and a classic bank run from the eroded trust.

Genesis Trading the Latest Domino to Fall after BlockFi

Winklevoss-owned Gemini exchange experienced an outage today, as Amazon Web Services EBS went down. This appears to be unrelated to Gemini’s Genesis partner halting its yield products. However, it does pour more FUD fuel on the contagion fire.

Headed by Tyler and Cameron Winklevoss, Gemini Trust maintains customers’ funds as a fully 1:1 reserve exchange, so even in extreme market conditions all funds are withdrawable. To verify this, Gemini undergoes annual audits and regular New York State Department of Financial Services (NYDFS) probes.

Genesis Trading provided the Gemini Earn program with yield products, as a separately funded unit from much larger Genesis Global Capital. The latter is a digital asset investment bank that serves institutional clients with $2.8 billion in outstanding loans, as of Q3 2022. Due to the withdrawal rush hitting most centralized platforms, Genesis halted all withdrawals today.

“FTX has created unprecedented market turmoil, resulting in abnormal withdrawal requests which have exceeded our current liquidity.”

From this follows that Genesis didn’t just lock in users’ collateral on loans, but used them for rehypothecation. The same practice was used by both Celsius and BlockFi, which also appears to be preparing for a bankruptcy filing. Otherwise, their liquidity would have remained stable. By the same token, they couldn’t have enticed customers with high-interest yields.

SALT and Liquid

In the same short span of time, the Salt Lending platform halted user withdrawals on November 15th, due to “the collapse of FTX”. However, SALT Blockchain CEO, Shawn Owen, assured the public that “none of our counterparties have any additional risks”.

Just like Gemini Earn, BlockFi, and Celsius, SALT launched as a lending service, in which users can deposit their cryptocurrencies as collateral for a loan. Once Salt’s FTX exposure was revealed, Bnk To The Future investing platform canceled its plan to acquire it.

Bnk To The Future is a prolific investor in the crypto space, from Coinbase and Circle to Kraken and BitStamp, but has no direct FTX exposure, according to the statement.

“Bnk To The Future has not been impacted from neither SALT nor FTX as Bnk To The Future has no direct or indirect connection with SALT or FTX and all client funds are fully segregated and uninvested.”

On the same day, Japanese crypto exchange Liquid Global suspended user withdrawals as well. In February, Sam Bankman-Fried announced the acquisition of Liquid, one of the first companies SBF bailed out, which eventually caused many to see SBF as a “modern-day J.P. Morgan”.

This came after Japan’s Financial Services Agency demanded FTX Japan suspend operations on November 10th.

Crypto Lost its Central Bank

The Federal Reserve tanked stocks and cryptos this year when it retracted liquidity with interest rate hikes. The same effect is happening with Alameda Research going down, one of the largest market makers in the crypto space.

It is important to understand that FTX was an attachment to Alameda, not the other way around. As SBF’s first large project, Alameda Research gained funds from a very simple strategy – arbitrage. Because Bitcoin price is typically different in Japan and Korea than in the US, SBF had Alameda buy Bitcoin on these markets and sell them at a higher price domestically.

This easy money-printing scheme began to lose its power once others joined the arbitrage party. That’s when SBF upgraded Alameda from an arbitrage trading firm to a market maker, such as Citadel Securities but for cryptos. In order to acquire a market-making level of liquidity for such a venture, SBF launched FTX in 2019.

Alameda and FTX then began to operate as effectively the same entity, allowing the exchange to trade against its users, in addition to frontrunning token listings. Moreover, SBF artificially inflated FTX valuation with altcoin wash trading. By buying and selling the tokens, such as FTT, MAPS, and SRM, he created an illusion of market activity and valuation.

This all crashed after CoinDesk published Alameda’s house of cards balance sheet on November 2nd. With $8.9 billion in liabilities and barely $900 million in liquid assets, Alameda/FTX tandem left a liquidity hole in the crypto market. Kaiko dubbed this event as Alameda Gap, visible in Bitcoin’s market depth.

Now that SBF created an environment in which decentralization is trending, a crypto liquidity crunch is underway. According to Kaiko, since November 5th, Bitcoin market depth has dropped across all CEXes: Binance (-25%), Kraken (-57%), Bitstamp (-32%), and Coinbase (-18%). In turn, both Bitcoin and ETH market depth is approaching May’s crash level.

Are there More Surprises Coming to Suppress BTC/ETH?

As the most decentralized cryptocurrencies with the largest market caps, BTC and ETH largely absorbed the FTX collapse. Bitcoin went down -13% over the month while Ether dropped by merely -5%.

Nonetheless, there are multiple potential price suppressors.

  • FTX exploiter is now a massive whale, holding 228,524 ETH (~$288M) and 108,454 BNB (~$30M). Will the exploiter dump all these coins, as the 35th largest ETH holder?
  • Holding 130,000 bitcoins, MicroStrategy has a margin call at a $13,500 price range, for a $205 million loan at Silvergate Bank. MSTR would then have to dab into its ample BTC supply to settle.
  • Silvergate (SI) itself dropped by -56% over the month. All the key crypto players use Silvergate’s exchange network (SEN): FTX, Coinbase, Paxos, Circle, Kraken, Bitstamp, Gemini, and Crypto.com. SBF described Silvergate’s importance as “life as a crypto firm can be divided up into before Silvergate and after Silvergate”.

The SI stock dropped after the revelation that Silvergate Bank had $425 million exposure to South American money launderers.

Lastly, Bitcoin miners are the most likely to dump BTC to cover their debt liabilities. Such a selloff spike is already apparent from glassnode data.

Combined with raising energy prices and overall FUD, it is becoming less profitable to be a miner. Yet, considering the wider picture, the miner selloff is not as acute as it could’ve been. When Bitcoin dropped to the two-year low ($17.6k) on June 22nd, miners sent $94 million worth of BTC to exchanges.

Comparatively, on the day of the FTX crash, on November 8th, miners sent $21.3 million worth of BTC, according to CryptoQuant data. Nonetheless, with so much uncertainty engulfing the crypto market, it will be a while before we see institutional and retail interest resurgence to compensate.

This article originally appeared on The Tokenist

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