Bitcoin sinks as FTX crisis spurs crypto contagion fears

Contagion fears are sweeping across the crypto industry, sending bitcoin dropping as market participants race to determine who is exposed to Sam Bankman-Fried’s digital assets empire.

Bitcoin, the world’s most actively traded crypto coin, fell 11 per cent to $16,500, hitting the lowest level since late 2020. Other tokens also sustained severe selling pressure, while crypto-related entities trading on traditional markets dropped.

The fresh bout of selling came amid mounting concerns that Binance will abandon its deal to buy Bankman-Fried’s crypto exchange FTX, just a day after agreeing a pact to bail out its smaller rival. Crypto media outlet Coindesk reported, citing an unnamed source, that Binance might back out of the tie-up, but the exchange told the Financial Times that it was still early in the process and it had not made a decision.

Crypto investors also turned their focus to Alameda Research, a proprietary trading firm controlled by Bankman-Fried that has been at the centre of the storm that has engulfed FTX.

Market worries over Alameda’s financial health accelerated on Tuesday, triggering a wave of withdrawals from customers at FTX, and pushing Bankman-Fried to seek a rescue from Binance.

As the impact of the shock deal set in, traders worried that the collapse of Alameda, one of the biggest traders on FTX, could resound through the markets at rapid speed.

“[Alameda] will be scrambling to liquidate assets on their books to meet any debt obligations, of which there are many. In addition to the loans owed to FTX, Alameda is also an active participant in decentralised finance,” said Sean Farrell, head of digital asset strategy at Fundstrat, a markets research provider. “There is sufficient reason to believe the risk of further contagion remains.”

Binance has declined to say whether its takeover plans for FTX include the trading firm. A bailout could help to insulate the digital assets industry and the exchange’s customers from further fallout but would add to the risks of the transaction.

Crypto traders have widely assumed that Binance will leave Alameda to fend for itself, and that the unwinding of its positions will inflict further pain on a market already reeling from the near collapse of FTX and a two-thirds fall in asset values this year.

“Crypto players are reacting quicker to news and rumour, which in turn builds up a liquidity crisis much faster than one would have seen in traditional finance,” said Fabian Astic, head of decentralised finance and digital assets at Moody’s, the rating agency.

Galaxy Digital, US billionaire Mike Novogratz’s crypto financial group, said on Wednesday it had exposure of nearly $77mn in cash and digital assets to FTX, of which $47.5mn was being withdrawn.

Others have rushed to reassure the market that they are not exposed to the exchange or FTT, the in-house currency for trading on FTX. Brian Armstrong, chief executive of Coinbase, said his company did not “have any material exposure to FTX or FTT” and no exposure to Alameda. Coinbase’s US-listed shares fell 10 per cent on Wednesday, while trading was briefly paused in a ProShares exchange-traded fund tracking the price of bitcoin due to volatility.

Most at risk will be companies that lent assets to Alameda and crypto projects in which the trading firm heavily invested, stakes it may now be forced to sell in order to balance its books.

The firm was a major backer of the blockchain Solana, whose native token lost more than 40 per cent of its value against the dollar on Wednesday.

“I don’t see a situation where [Alameda] comes back from this . . . I think they were staking a lot on the value of that FTT token,” said one person familiar with the matter. “Alameda should have been able to fix this if they actually had what they said they had, and this is a clear signal they don’t.”

Jon de Wet, chief investment officer at crypto wealth manager Zerocap, which has traded with Alameda in the past, said Alameda was until recently seen as a solid counterparty for lenders and hedge funds across the crypto sector.

“Alameda was a respected firm,” he said. “I think there will be a lot of firms that would have had exposure to Alameda.”

The trading firm was founded in 2017 by Bankman-Fried to pursue arbitrage opportunities across different countries and exchanges in the nascent crypto asset market, and has since expanded its activities.

“Alameda came before FTX. It would take its balance sheet and it would provide liquidity on exchanges and earn a spread. It would also take directional bets as prop trade,” said de Wet.

The scale of the pain will depend on whether Binance also backstops Alameda. Late on Tuesday FTX told the FT that “Alameda is included in the deal”.

Binance declined repeated requests to clarify its position. Its silence will probably reinforce the views of those in the market who assume the trading firm will be allowed to fail.