Why Bitcoin, Ethereum and Aptos are down Tuesday morning

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What happened

Cryptocurrencies didn’t just wake up on the wrong side of the bed this morning; they had a horrible night. At 9:45 p.m. ET on Monday, the bottom fell from the FTX Token (FTT -18.70%) and the race was on to sell everything in crypto.

The worst of the decline was reserved for smaller cryptocurrencies, but as of 9:40 a.m. ET, Bitcoin (BTC -0.50%) fell 5.8% in the past 24 hours, Ethereum (ETH -1.04%) is down 7.5%, and Aptos (APT -6.32%) fell 13.3%.

So what

Drama has been building in the crypto space for about a week after CoinDesk reported that Sam Bankman-Fried’s trading arm, Alameda Research, had $14.6 billion in assets and $8 billion in liabilities. This is not a problem in itself, but CoinDesk also said that $5.8 billion of the assets were the FTX token, FTT. It should be noted that Bankman-Fried also founded the FTX exchange, which is one of the leading cryptocurrency exchanges.

Over the weekend, Binance CEO Changpeng Zhao announced that he would sell nearly $500 million worth of FTX tokens, prompting speculation that their value would plummet. This is exactly what happened on Monday night, whether due to Binance selling or traders anticipating the sell-off.

At the same time, customers are withdrawing money from FTX’s exchange, which could cause a “run on the bank”. Nansen reported that FTX withdrew $1.2 billion worth of Ethereum and ERC-20 tokens in the past 24 hours, compared to $540 million in deposits. CryptoQuant says FTX’s Bitcoin reserves were zero at one point.

Banks and stock exchanges usually do not hold enough reserves to pay out their money to all customers if they withdraw everything at once, which is called a bank run. This can cause panic selling and make a business insolvent quite quickly.

Now what

It is reminiscent of the summer collapse of Three Arrows Capital, which brings down Celsius Network and Voyager with. The leverage investors didn’t know about on the balance sheet suddenly became problematic when crypto stocks plummeted and loans were called off.

We’re not sure if this is what’s happening in Alameda with the FTX token, but given the price action and money flowing out of FTX, investors are taking a cautious approach.

What happens next is unclear. FTX is still one of the biggest exchanges, and if it fails, the crypto impacts could be huge. I wouldn’t be surprised if this wasn’t the end of the crypto price decline, although it does mean a buying opportunity for long-term investors, as an exchange can fail, but not a token.

Travis Hoium has positions in Ethereum. The Motley Fool has positions and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

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