Updated (Nov 11th): Why Is the Cryptocurrency Market Down Right Now?

Update 11/11/2022 – Venture capital fund Sequoia Capital posted on Twitter a letter sent to its partners, revealing that the company has valued its $213.5 million investment in FTX and FTX US at $0, with the fund admitting a total loss. The letter further stated that the crisis facing FTX had created a “solvency risk” across the market.

The founder of the crypto exchange FTX Sam Bankman-Fried published a series of posts on the social network Twitter on Thursday, in which he apologises to all investors and clients for the damage caused. The head of FTX admitted that he should have taken a better and more transparent approach to FTX’s problems.

Crypto lending platform, BlockFi, published an announcement yesterday informing that it is suspending withdrawals for its clients due to the problems of the FTX crypto exchange. BlockFi management said that the platform cannot operate as usual due to the uncertainty surrounding FTX and Alameda.

BlockFi will temporarily operate in a restricted mode, asking clients not to make deposits to BlockFi wallets as well as interest-bearing accounts on the platform. BlockFi received a $250 million financial injection from FTX in June of this year, and it is speculated that a significant portion of its assets may have been placed on the FTX exchange.

According to available information, the Japanese financial regulator FSA (Financial Services Agency) has taken administrative action against the related exchange FTX Japan after the suspension of withdrawals by FTX. The financial regulator said it issued suspension orders for some activities and various business improvement requirements per Japan’s Payment Services Act and Financial Instruments and Exchange Act.

The Japanese regulator was joined by the Department of Financial Protection and Innovation (DFPI) in the state of California, which, according to published announcements, plans to investigate the problems of the FTX crypto exchange. DFPI has urged anyone in the state of California who has been affected by the events of the ongoing FTX case to use a dedicated 24/7 hotline. The DFPI has thus joined the growing list of US regulators who have launched an investigation into the FTX exchange.

Positive news regarding the state of inflation in the United States managed to slightly improve the uncertain situation in the cryptocurrency market yesterday. The year-on-year inflation rate measured by the CPI index reached a lower level of 7.7%, compared to analysts’ forecasts of 7.9%. Bitcoin and Ethereum prices have risen slightly in response to the news over the past 24 hours, with Bitcoin currently trading at $17,400 and Ethereum at $1,285.

Update 11/10/2022 – In the late hours of Wednesday, Binance announced that it would not proceed with acquiring the FTX crypto exchange. In its decision to withdraw from the trade, Binance cites recent reports regarding the mishandling of customer funds by FTX and the alleged opening of an investigation into the exchange by US authorities.

The exchange’s web portal FTX.com was unavailable for several hours on Wednesday evening and was restarted during the night. However, after opening the page, there is a warning at the top of the page that the exchange is currently unable to process withdrawals and advises clients not to make any deposits to the exchange.

Furthermore, there were reports on Twitter that Sam-Bankman Fried had asked investors for emergency funding of $8 billion to cover “critical liquidity”. Fried is reportedly trying to raise at least 4 billion from investors, while he would like to cover the remaining amount with debt financing and even his own property.

The crypto market reacted to the news from Binance with a collapse. The price of Bitcoin fell as low as $15,600 at one point, while it is currently trading at $16,500. Ethereum also fell, currently trading in the $1180-1200 price range.

On Tuesday in the early evening, a wave of sales started on the cryptocurrency market and related liquidations on derivative markets.

The best-known and most popular cryptocurrency, bitcoin, fell from $20,700 to a local low of $17,166 (Binance) within a few hours last night, claiming a short-term loss of up to -17%. Bitcoin bounced back from the local low to close Tuesday’s trading day at $18,500, a loss of -8.39%.

The last time bitcoin traded in the price range between $17,000 and $18,000 was in the second half of November 2020, before the beginning of the largest bull market in cryptocurrency history to date.

Market number two, Ethereum, lost up to 14.97% during the last 24 hours. Ether was still trading above the $1,500 price range last night, with a market correction pushing its price into the $1,250-$1,300 investment range.

In addition to Bitcoin and Ethereum, the correction also affected other altcoins. In the last 24 hours, the cryptocurrency cardano has fallen by 6.7%, polygon by 20%, and solana has claimed a day loss of up to -35%.

The market correction caused a massive outflow of capital from the entire cryptocurrency market. Since Tuesday, the total market capitalisation has fallen nearly 10% from $985 billion to $890 billion. However, Bitcoin’s dominance remained almost unchanged.

According to available information, more than 875 million dollars were liquidated in the derivative markets within 24 hours. Bitcoin markets saw the most liquidations at 233 million, followed by liquidations of Ethereum positions at 175 million. Significant liquidations of positions were also recorded on Solan and FTT, where trade positions were liquidated in the amount of 41.5 million and 28.4 million dollars.

What Has Happened?

The sharp change in sentiment in the cryptocurrency market is closely related to the case surrounding the crypto exchange FTX and the related company Alameda Research. In the past week, speculation surfaced that these companies owned a huge amount of illiquid tokens. More precisely, of the assets that little Alameda has on its balance sheet totalling 14.6 billion, almost 6 billion were held in the form of FTT tokens (tokens of the crypto exchange FTX) or in the form of positions expressed in FTT.

Additionally, the company had high exposure to solana and serum tokens, with Sam Bankman-Fried (founder of FTX) being one of the early investors in the Solana project and also helping to establish the Serum decentralised exchange.

On Sunday in the early evening, the founder of the Binance crypto exchange Changpeng Zhao reacted to this situation and decided to limit this risk and sell all the FTT tokens owned by Binance precisely because of the unclear situation regarding the security of FTT. It was this statement and the subsequent sale of assets that was the catalyst for launching a wave of distrust in relation to FTX, which led users to mass withdrawals.

High volumes of withdrawals further multiplied the bad situation of the FTX exchange, which had to settle a huge number of withdrawals from clients in a short time, probably also from its own resources by selling assets owned by the exchange (FTT token, solana, serum and others) in order to cover client withdrawals.

On-chain data shows that outgoing transactions from the FTX exchange stopped on Tuesday afternoon, indicating that the crypto exchange was no longer able to process capital outflows and, therefore, completely suspended withdrawals from its platform. This has led to speculation among the crypto community as to whether FTX even has any assets left to cover its client liabilities.

A few hours after the suspension of withdrawals, the founder of the crypto exchange Binance, Zhao, announced plans to acquire the exchange FTX after an agreement with its founder Sam-Bankman Fried. Zhao said that Binance has arrived at the decision after being asked for help by the FTX exchange. In order to protect users, Binance management and FTX have signed a preliminary agreement of intent to acquire FTX in order to safely manage the current liquidity crisis.

The cryptocurrency market initially reacted positively to the acquisition by Binance. The price of bitcoin and several altcoins rose after the announcement of the acquisition, but only briefly. Subsequently, a correction and a kind of snowball effect started on the market, which was driven by concerns about the possible impact of the fall of FTX on other companies, such as BlockFi or Voyager Digital, which the FTX exchange had saved in the recent past. The massive correction pushed asset prices down to 2-year lows.

For the crypto industry, the case regarding the FTX exchange is another good example that even popular and prosperous companies can very easily get into huge problems with bad management and excessive greed. The case of FTX, or the recent infamous cases of Celsius and the investment fund Three Arrows Capital, showed the importance of securing reserves and proper management of liquidity management, especially in times when market sentiment is not very positive. As a result of this situation, we can expect a strengthening of the crypto community’s pressure to increase transparency and expand the information obligations of exchanges as well as other market players.

Better to Invest Than to Speculate

Investing in cryptocurrencies behaves just like investing in anything else. All markets sometimes go up and sometimes go down, and cryptocurrencies are no exception. They differ from other assets only in the degree, time and speed of these fluctuations. The cryptocurrency market is volatile, which can make new investors nervous. But it is precisely the price corrections that represent an opportunity to expand your investment portfolio. 

Focus on long-term investing rather than speculations where people aim to make a quick profit. Speculation is associated with great risk because no one can predict the development of the market in a short time. However, what can be predicted better is the long-term growth of the market. Investors have often found that the longer their funds are invested, the higher the chance of making a profit. And Fumbi products are built precisely on the fact that the cryptocurrency market will grow in the long term.