Meanwhile, investors in popular digital currencies got some relief from the latest crypto crisis this week after days of selling. Bitcoin rose to US$17,691 after dropping as low as US$15,512 midweek. Ethereum rose 12 per cent. The gains came after a US government report showing inflation cooled a bit last month gave a lift to riskier assets.
The crypto world had hoped that Binance, the world’s largest crypto exchange, might be able to rescue FTX and its depositors. However, after Binance had a chance to look at the books of FTX, it became clear that the smaller exchange’s problems were too big to solve.
A person familiar with the dealings between FTX and Binance described the books as a “black hole” where it was impossible to differentiate between the assets and liabilities of FTX the exchange and those of Alameda Research. This person spoke on condition of anonymity because they weren’t authorised to speak publicly about the matter.
This person said Bankman-Fried committed the “ultimate sin” by tapping into FTX’s custodial assets to fund Alameda Research.
In a further illustration of FTX’s financial straits, Bankman-Fried asked his investors for US$8 billion to cover withdrawal requests, according to The Wall Street Journal, citing unnamed sources.
In a series of Tweets, the FTX founder and CEO said that he did not have enough liquidity to cover withdrawals and that he was more leveraged than he had thought.
The latest crisis in the crypto industry prompted renewed calls for stricter regulation. White House press secretary Karine Jean-Pierre said the FTX developments “highlights why prudent regulation of cryptocurrencies is indeed needed. The White House, along with the relevant agencies, will again closely monitor the situation as it develops.”
The collapse of the cryptocurrency’s third largest exchange is likely to cause further disruption across the entire crypto world, analysts say, meaning the rally could be temporary.
“The unwinding of FTX, as well as its shock of confidence to the system, will cause crypto prices to fall even further leading to “a new cascade of margin calls”, said analysts at JP Morgan in a note to investors. This would be similar to the selloff that happened after the collapse of the stable coin Terra earlier this year, where prices continued to decline weeks after its failure.
“This deleveraging is likely to last for at least a few weeks unless a rescue for Alameda Research and FTX is agreed quickly,” JP Morgan analysts wrote.
The crypto industry is waiting to see what other companies are impacted by the FTX collapse. The venture capital fund Sequoia Capital said it is writing down its entire US$150m investment in FTX.
