Crypto-Linked Stocks Plunge on Mounting Fears After FTX Collapse

Crypto winter is getting even colder this week as FTX, one of the biggest crypto exchanges in the world, stands on the brink of a collapse after a liquidity crunch. Moreover, FTX’s rival and potential buyer of its non-U.S. operations, Binance, decided to walk away from the rescue deal Thursday.

FTX Collapse Could Leave Long-term Consequences

Crypto-exposed stocks, including Coinbase (NASDAQ:COIN), MicroStrategy (NASDAQ:MSTR), Galaxy Digital (TSX:GLXY) and Block (NYSE:SQ), among others, are deeply in the red this week on mounting fears that the FTX event will leave long-term consequences on the crypto industry.

“What is complicating today’s mood on Wall Street is that the liquidity crisis for FTX is spilling over into other cryptos,” Edward Moya, senior market analyst at Oanda, said.

“FTX was viewed as one of the so-called safe crypto players and their demise is raising concerns that other key crypto companies could be vulnerable here.”

MicroStrategy, a software as a service (SaaS) business that is heavily invested in Bitcoin, saw its shares drop about 30% this week following the FTX collapse. The company held roughly 130,000 BTC, or around 0.62% of the cryptocurrency’s total circulation. The firm’s former CEO Michael Saylor is known for his deep convictions that Bitcoin represents a valuable store of value and a reliable hedge against inflation.

Similarly, the recent drop in Galaxy Digital’s shares comes due to the company’s considerable exposure to FTX’s native token, FTT. Earlier this month, Galaxy reported $76.8 million in exposure to FTX, $47.5 million of which were in the process of withdrawal.

FTT price is down almost 90% this month, reflecting fears that the FTX will go bankrupt. The global crypto market cap also plunged, hitting levels below $800 billion for the first time since January 2021. Bitcoin plunged below $16,000 for the first time since 2020.

Investors are now expecting the U.S. Securities and Exchange Commission (SEC) to take an even harsher approach to regulate crypto. This type of regulatory environment may benefit some crypto-focused companies, like Coinbase, according to Citi analysts.

"We do think this event increases the sense of urgency for legislative action, which likely helps to level the playing field, encourages increased institutional adoption and perhaps establishes legitimacy for trusted players focused on sustainability regardless of the crypto season," analysts said in a note.

What Happened to FTX?

The pressure on the FTX exchange started piling up after CoinDesk reported the balance sheet of Alameda Research, a crypto trading firm also owned by FTX CEO Sam Bankman-Fried, was inflated by FTX’s native token FTT.

The report said Alameda’s FTT holdings amounted to $5.8 billion, in addition to $1.2 billion and $2 billion in Solana and equities, respectively. Further, the firm also had $2.2 billion in loans that were collateralized by FTT.

Shortly afterward, Binance CEO Changpeng “CZ” Zhao said his crypto exchange is off-loading all of its FTT holdings, worth $530 million, due to “recent revelations” regarding FTX. While CZ did not specify what revelations exactly he was referring to, it wasn’t hard to conclude that he was likely referring to news involving Alameda.

Binance’s decision caused a massive sell-off in the crypto market after investors withdrew $6 billion in crypto from the FTX in just 72 hours.

Zhao then offered to acquire FTX and save the rival exchange from a “liquidity crunch.” Binance signed a non-binding agreement to buy FTX’s non-U.S. assets in a bailout move, though that did little to stop the sharp sell-off in the market. However, the optimism was short-lived as Binance ultimately decided to back away from the deal.

"As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” said Binance’s spokesperson.

The crypto exchange initially hoped to help FTX’s customers by providing liquidity, but “the issues are beyond our control or ability to help. Every time a major player in an industry fails, retail consumers will suffer,” Binance added.

The potential fall of one of the world’s largest and most trusted crypto exchanges is “not good for anyone,” added Zhao. The recent reports show that FTX was potentially using its native token to leverage its numerous positions and taking advantage of client funds for controversial purposes.

One such example is rescuing FTX’s sister firm Alameda Research, which was potentially bailed out by FTX in Q2.

Just like TerraUSD (UST) and LUNA in May, FTX’s price tanked after Zhao announced Binance is liquidating its FTT holdings. The sell-off spilled over to nearly every asset in the digital assets industry, including cryptocurrencies and the aforementioned crypto-exposed stocks.

Summary

The likely collapse of the U.S.-based cryptocurrency exchange FTX has facilitated a massive selloff in crypto-linked stocks on fears investors may lose appetite for digital assets. The short-lived optimism about the recovery quickly disappeared after Binance walked away from the deal to acquire FTX, sending Bitcoin to two-year lows.