Crypto contagion spreads after FTX collapse

Crypto contagion spreads after FTX collapse

Bitcoin has fallen to a two-year low against the US dollar, hitting around $16,000 per coin, and ether is slipping towards $1,100.

Mr. Bankman-Fried, along with his leadership team Gary Wang and Nishad Singh, is under the authority of the Bahamas, where FTX was headquartered.

The AAX Hong Kong exchange has suspended trading for 10 days, citing the failure of an unidentified third-party partner.

“The FTX situation has put tremendous pressure on exchanges everywhere as users are nervous about exchange holdings,” said Ben Caselin, vice president at AAX.

“In my observation, this can be resolved in a matter of days, although restoring market confidence may take months.”

The crypto industry has suffered several high-profile and damaging events this year.

Most notably, the collapse of a crypto bank called Celsius sparked a violent sell-off in May, with investors rocked by the discovery that Celsius had used customer “deposits” to fund its own risky trades.

When investors got wind that their money was tied up in complex, risky deals, they began withdrawing en masse. The resulting bank run bankrupted Celsius and triggered the collapse of a widely used algorithmic “stablecoin” called Terra/Luna.

Collapse of related companies

Signage for the FTX Arena, where the Miami Heat basketball team plays, is visible Saturday

With Terra/Luna reportedly worth $1 on the balance sheets, hedge funds like Singapore-based Three Arrows Capital have struggled to plug the lock left by an asset that had fallen to $0.

Bankman-Fried’s quant firm Alameda Research is understood to have had significant exposure to Three Arrows Capital and Celsius.

The collapse of these linked companies reportedly blew up much of Alameda’s balance sheet and eventually led to the resignation of then-co-CEO Sam Trabucco.

At this point, Mr. Bankman-Fried is said to have bolstered Alameda’s balance sheet with funds from the FTX exchange.

The failure of crypto companies to hold enough assets in reserve to fight a run and the knowledge that customer funds are being used for profit-oriented trading has led to a great deal of uncertainty in the crypto markets.

Over the weekend, crypto exchange chiefs attempted to address skepticism surrounding their liquidity and began sharing their “proof of reserves.”

Among many others, Crypto.com released its digital asset addresses, revealing how many and which digital assets it has stored on behalf of its clients.

However, many observers were quick to point to a suspicious transfer of 320,000 ETH ($400 million) to a wallet address linked to another exchange called Gate.io in October. The transfer was returned to Crypto.com, but CEO Kris Marszalek said the transaction was an error.

“It was supposed to be a move to a new cold storage address, but was sent to a whitelisted external exchange address,” he said.

Cronos, the token underpinning Crypto.com’s business, is down 25 percent in the past 24 hours, and 98 percent of all transactions made on the Cronos blockchain Monday were withdrawals.

The sharp drop in price followed a tweet on Sunday from Binance Global CEO Changpeng “CZ” Zhao, who appeared to be directing his comments at the Singapore exchange.

Second transmission error

“If an exchange needs to move large amounts of crypto before or after they show their wallet addresses, that’s a clear sign of trouble. Stay away.”

However, this is the second transmission error Crypto.com has made.

In August, Crypto.com took legal action against Melbourne-based investors Manivel and Thilagavathy Gangadory after the couple spent $10.5 million mistakenly transferred to them.

Instead of a $67 refund, Crypto.com mistakenly sent them $10.5 million, which they then spent on buying property in Victoria.

Not only were investors spooked by Monday’s $400 million blunder, but they are also wondering how much exposure Crypto.com has to FTX.

In Crypto.com’s “proof of reserves,” analysts noted that it holds about $3 billion in stablecoins in its wallets. A stablecoin is a digital asset that is said to be pegged to another asset, such as the US dollar.

But on Monday, these analysts revealed that Crypto.com had shipped more than $1 billion ($1.5 billion) worth of stablecoins to FTX over the past 12 months.

FTX is not only an exchange that allows users to trade digital assets, but also offers “bridging” services. A crypto bridge connects two different blockchains.

Crypto.com’s Mr. Marszalek said the funds were used to hedge orders and the total exposure to FTX was less than $10 million.

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