Impact of the FTX Incident: Market Trends and Subsequent Risk Assessment

Author: Flora Li, Nolan Liu, ZengHang, Barry Jiang, Huobi Research

1. Event Review

The FTX incident seemed to enter a new phase on November 9, with events that occurred in the past 24 hours almost certain to be etched in the history of the cryptocurrency industry. Below is the current situation of the incident, and we hope to provide readers with a comprehensive understanding through some key numbers:

1) On November 2, Coindesk reported that Alameda's balance sheet had significant risks, with approximately $6 billion of its total $14.6 billion in assets being FTT and SOL.

2) On November 6, CZ tweeted that he would gradually sell approximately $23 million worth of FTT. Following the news, FTT began to decline, stabilizing around $22 after the Alameda CEO expressed willingness to buy the FTT that CZ intended to sell at that price. However, nearly $1 billion in assets had already flowed out of FTX and Alameda within these two days.

3) On November 8 at 11:00 (UTC+8), market rumors suggested that FTX sold 100 million bits and other tokens to replenish liquidity, further triggering concerns about FTX's liquidity crisis and causing FTT to drop to $16. However, in the afternoon of the 8th, two of FTX's hot wallets did not transfer any coins for two hours, further inciting panic, leading FTT to drag the market down further.

4) On November 9 at 0:09 (UTC+8), SBF and CZ simultaneously tweeted that FTX and Binance had reached a non-binding intention: Binance would acquire FTX's global platform to help FTX cope with liquidity constraints. After the announcement, the market rebounded significantly, with FTT returning above $20, and BTC and ETH also recovering to $20,000 and $1,500 levels, respectively.

5) On November 9 at 2:00, the U.S. Commodity Futures Trading Commission stated that it was monitoring the transaction of Binance acquiring FTX. There were voices suggesting that the rapid nature of this acquisition might be due to the relatively low acquisition price, which would result in losses for FTX's previous investors and could potentially violate antitrust laws in various countries. These concerns raised doubts in the market about whether the acquisition could be completed. Compounding the issue, SBF stated in an internal letter to the company on Tuesday morning that FTX had seen $6 billion withdrawn in the past three days, making the market realize that FTX's funding gap exceeded previous estimates.

On November 9 at 8:00, FTX suspended all cryptocurrency withdrawals. This series of events led to further market collapse, with FTT's price dropping below $5, BTC falling below $17,000 at its lowest, and ETH dropping below $1,300. Currently, the amount of stablecoins in FTX's wallets has decreased by over 80%, now totaling less than $200 million, with BTC having less than 40 coins.

2. Scope of Impact of the FTX Incident and Subsequent Predictions

2.1 Impact of the FTX Incident

The impact of this FTX crisis may extend beyond the institutions that were affected but did not go bankrupt during the Luna and 3AC collapses, penetrating deep into various corners of the industry. Institutions that continued to participate in lending to FTX carry significant liquidation risks. We can understand the impact of this incident on three levels:

a) Direct Impact Level: Projects directly invested in by FTX and Alameda, as well as centralized institutions with direct lending and cooperation relationships with FTX. The project level mainly includes important public chains and DEXs such as Solana, Fantom, and Serum, as shown in the table below. These are the direct victims of the FTX crisis.

We analyzed Alameda's asset situation, and currently, Alameda's monitorable wallets hold valuable tokens ranked as follows: BIT, SUSHI, FTT, SRM, LDO, MATIC, RNDR, etc.

BIT: It is currently unclear whether it will violate commitments to unlock; FTX promised not to unlock, but the value of BIT in Alameda's wallet has reached 23%, and market confidence is insufficient, making it a high-risk asset.

SUSHI: Alameda holds a total of 3.4 million xSUSHI and can withdraw 4.8 million SUSHI, but the on-chain liquidation price for large amounts of SUSHI is very low and is expected to be unreachable, making it relatively safe for now. Currently, the market's fear of Alameda's massive holdings is leading to insufficient confidence.

MATIC and RNDR: These have strong liquidity and are not SOL-related assets, likely to be prioritized for selling to recover funds. RNDR has dropped by 26%, and MATIC has fallen by 20%. If tokens in the balance are transferred to trading platforms, they will continue to decline.

FTT: The platform token of FTX, which is said to have been borrowed significantly by Alameda and used as collateral. However, the lending does not exist on-chain, making it impossible to know the specific liquidation details. Based on collateral, the price of FTT is favorable for Alameda and may be used as a last resort.

SRM: This is a project closely related to FTX and Alameda, with a long-standing close relationship. Currently, the token price has severely collapsed, similar to other protocols on Solana, with TVL dropping 20%-30% in 24 hours.

SOL: There is a significant risk of asset liquidation on-chain, with one large on-chain holder currently having 2,095,598 SOL (worth over $38 million) as collateral and $48,038,000 in USDC debt. If the oracle recovers, it will trigger liquidation, causing a significant price drop.

As for institutions with business ties to Alameda, there is currently no public information to confirm, but they certainly exist.

b) Indirect Impact Level: Projects that are market makers and equity swap projects associated with Alameda, or projects heavily tied to assets like FTT, such as bitDao, MIM, etc. Although these projects do not have investments from FTX, they have deep business interactions with it and will also be significantly affected under the current circumstances.

c) Radiation Level: Other assets in the market, mainly influenced by related assets and driven by market panic.

In short, during the three years of FTX's rise, as the second-largest centralized exchange, its reach has penetrated various aspects of the industry. We cannot fully quantify the losses this incident will cause to many projects, but qualitatively, compared to the Luna incident, the FTX incident can be considered the Lehman moment of the cryptocurrency world.

2.2 Subsequent Market and Progress Predictions

a) From a market perspective, before the FTX crisis, the market was already in a deep bear market. Following the tightening of macro monetary policy and the events of Luna and Three Arrows Capital, BTC fell to $18,000. However, in recent months, although the Federal Reserve's continuous rate hikes have tightened the macro environment, the overall market has entered a relatively stable phase, with BTC not only maintaining the $18,000 level but also slowly rebounding to around $21,000. As the peak of rate hikes seems to be passing, the collapse of FTX has caused the market to turn downward again, with BTC dropping below $17,000 and ETH falling below $1,300. The last time BTC was around $17,000 was two years ago in November 2020. Therefore, it can be said that aside from the five-month support, the long-tested $18,000 level can be trusted, while prices below it currently lack credibility, and the market has not reached a consensus on the next key level.

b) From the possible paths of event development, firstly, Binance's acquisition faces many difficulties: this acquisition is subject to scrutiny from U.S. regulatory agencies and potential legal risks of violating antitrust laws, which could lead to the failure of Binance's acquisition. Additionally, FTX's financial loopholes far exceed market expectations, which even made CZ tweet in astonishment, deterring other potential acquirers in the market, such as Coinbase, which has explicitly stated it will not acquire FTX. Based on the above analysis, we believe that the window for Binance to acquire FTX is narrowing, but to maintain the influence of U.S. local elites in the cryptocurrency space, there may ultimately be a domestic force stepping in to rescue FTX. However, from the current perspective, there is still no sign of hope, and the market will continue to suffer painful torment until a turnaround occurs.

c) From the perspective of industry impact: This incident has once again triggered distrust in centralized exchanges within the industry. To strengthen industry confidence, both Binance and Huobi have stated that they will publicly disclose auditable Merkle tree reserve proofs or POF within a month. Meanwhile, calls for increased regulation within the industry have resurfaced, with Coinbase's CEO stating that the FTX incident will lead to stricter regulations for the crypto industry in the U.S. This incident will become a landmark historical event from the perspective of industry norms.