Cryptocurrency market players are staring at a prolonged slump for their industry, and for digital coins, as the collapse of the once-mighty virtual token exchange FTX spreads unease across the sector in a year that has already wrecked valuations in the asset class.
Founded by Sam Bankman-Fried, one of the most prominent personalities in the cryptocurrency world, FTX filed for bankruptcy protection in the U.S. last week after it failed to meet a torrent of withdrawals, delivering another shock to the virtual asset sector after similar woes befell other big names, including crypto hedge fund Three Arrows Capital, Celsius Network, and Babel Finance.
In a report published this week, analysts Taimur Baig and Chang Wei Liang of DBS Group Holdings, Southeast Asia’s largest bank, noted that developments related to FTX pushed key crypto prices to new lows for the year, with the two biggest cryptocurrencies, Bitcoin and Ethereum, both down about 65% so far this year.
“Corrections may not be over,” the analysts warned in the report. “Prominent exchange failures, liquidity issues, fraud, regulatory scrutiny, and [the] rising cost of capital have combined to create a crisis of confidence among many investors.”
The crisis has been dubbed a “crypto winter” by observers, with market turmoil bringing digital coins down from their peak capitalization of about USD 3 trillion last November to less than USD 1 trillion in July—and prospects for recovery growing dimmer as the year closes with the fall of FTX.
The collapse of the exchange comes after Bankman-Fried, who has since resigned as chief executive of the company, desperately sought billions of dollars to save his company.
Customers rushed to pull their assets out of FTX following concerns over its financial health and links between the exchange and Alameda Research, an outfit that dabbled in aggressive trading strategies and was also founded by Bankman-Fried.
FTX had grown to rival Binance, headed by Changpeng “CZ” Zhao, another high-profile name in the digital asset industry, as one of the world’s largest crypto exchanges. It had the backing of big-name institutional investors from Japan’s SoftBank to Singapore’s Temasek, as well as celebrities such as American football star Tom Brady.
But the effect of the company’s collapse has also extended to venture capital and institutional investors, including Asian backers.
On Thursday, Temasek announced it will write down its entire USD 275 million investment in FTX, “irrespective of the outcome of FTX’s bankruptcy protection filing.” Across two funding rounds from October 2021 to January, the state investor had invested USD 210 million in FTX International and USD 65 million in FTX US, both for minority stakes.
“It is apparent from this investment that perhaps our belief in the actions, judgment, and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced,” Temasek said in its statement.
“The FTX fallout will be wide-ranging—their hands were in many things,” Kyle Klemmer, co-founder of crypto gaming platform Mech.com, told Nikkei Asia, adding that in his assessment, aside from the toppling of Bankman-Fried’s empire, token prices will dip as interest rates rise.
Investors have shied away from risky and volatile assets like cryptocurrencies this year as inflation soared and central banks raced to tighten monetary policy in response. FTX’s downfall has done little to revive confidence in virtual coins and those facilitating their trade.
“The month of December will be especially harsh,” Klemmer said. “Outcries [for] transparency have been loud and decisive. The crypto community unified in a major way to demand transparency of the largest exchanges.”
Regulators in Asia, such as the finance hubs of Singapore and Hong Kong, are maintaining close scrutiny of the digital assets industry because of the turmoil. FTX was founded in Hong Kong, and remains on the city’s corporate registry, but moved its headquarters to the Bahamas last September.
The Chinese city’s strict regulations on the trading of digital assets have largely shielded Hong Kong fund managers and retail investors from FTX’s collapse. However, a chill has spread through the sector, with venture capitalists and digital asset managers lamenting the prospect of a prolonged crypto winter.
Several investors with whom Nikkei spoke said they have written off their investments after FTX filed for bankruptcy last Friday. “This is very serious, lots of people will leave crypto forever,” one said on condition of anonymity.
But Hong Kong Financial Secretary Paul Chan reaffirmed the city’s commitment to becoming a virtual asset hub on Sunday, saying on his blog that regulatory compliance and greater transparency are needed in the sector.
“Our policy statement released recently is conducive to building such an environment, and has made the industry very hopeful about the development of Hong Kong’s virtual asset market,” he wrote, referring to the government’s decision to loosen cryptocurrency restrictions that currently allow only professional investors and individuals with assets of USD 1 million or more to trade.
In Singapore, regulators last month proposed a ban on credit lines to fund cryptocurrency purchases, as the city-state took another step to rein in the digital asset sector.
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The once freewheeling crypto space is gradually coming to terms with increased oversight from authorities in some of Asia’s finance hubs, limiting businesses’ ability to engage token trading communities without boundaries.
The combined pressures of depressed coin prices as the flight from risky investment vehicles persists, the continued unraveling of prominent digital asset service providers, and tighter regulatory prospects point to a long, hard downturn for crypto market participants.
“The entire crypto market is likely to remain depressed for the rest of the year as investors wait to see which companies were impacted by the FTX collapse,” said Ruadhan O., lead developer at crypto project Seasonal Tokens. “There’s likely to be a cascade of bankruptcies over the coming weeks as companies with exposure to FTX reveal the extent of their losses.”
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.