Eyes set on the future: how will crypto recover from the FTX fallout
Ordinary users are harmed every time a significant company in an industry collapses. Unfortunately, this creates distrust in crypto. However, the crypto industry is much stronger now than it was a couple of years ago. Its ecosystem has expanded massively, and honest market players will likely drive out those who exploit consumers’ assets. Moreover, the ecosystem will strengthen as legal frameworks are created, and the sector continues progressing toward greater decentralization.
In hindsight, even before the FTX crash, 2022 was an unsatisfactory year for cryptocurrencies; this latest price decline in crypto is not the first. So, let’s dig in and pave the way to recovery.
History lessons: The 2014 fall of Mt. Gox
Let’s take it back a notch and explore the Mt. Gox hack of 2014 before drawing any conclusions on the current state of the crypto market. People familiar with the exchange’s inner workings were not surprised by its bankruptcy, the loss of $460 million, or the $27.4 million missing from its bank accounts.
On the inside, Mt. Gox was a confusing mixture of poor administration, neglect, and incapable experts. That said, the exchange was mostly a mirror of its CEO and significant shareholder, Mark Karpeles.
The primary takeaway from the Mt. Gox disaster is that the world of cryptocurrencies, including Bitcoin and altcoins, is still new and quite unlike established financial systems. Since bankruptcy law could not handle the consequences, the move to civil rehabilitation sets a significant precedent for the crypto industry.
The crypto world has recovered from the 2014 fallback, with new successful exchanges emerging and operating securely to this day. The market has seen an incredible recovery and peaked last year, recording the highest prices for Bitcoin and Ethereum in November 2021.
The FTX collapse and its effects explained
Based on trading volume and active users, FTX was one of the biggest centralized crypto exchanges in the world. But on November 11, 2022, the exchange declared bankruptcy after discovering black holes in its balance sheet. Investigations found record-keeping errors, a slew of accounting errors, and waning investor trust, all of which contributed to the FTX crypto crash. Its CEO and founder, Sam Bankman-Fried, has been accused of engineering “one of the biggest financial frauds in American history”.
A share in the FTX company was represented by the FTT token, which is the FTX exchange’s native token. According to reports, crypto hedge firm Alameda Research utilized the FTT token to finance risky loans, which led owners of FTT to sell their tokens and remove their assets from FTX. There’s also a claim that Alameda enabled wire transfers for FTX clients, thus enabling illegal activity.
There is a lot of resemblance between the Mt. Gox hack and the FTX crisis. They share a history of bad management, poor security, insider trading activity, centralized decision-making authority, speculative CEO activity, and a neglect of responsibility to their clients.
Days after declaring bankruptcy
After FTX declared bankruptcy on November 11, many other businesses were required to reveal their exposure to FTX and its affiliated companies. So what happened in the following days?
- Genesis Trading reported that its trading desk has $175 million in “frozen money” in its FTX trading account. Later, due to unpredicted market volatility, they were forced to halt withdrawals from its lending division.
- The Gemini Exchange warned that withdrawals from its Earn product would be delayed due to Genesis, Gemini Earn’s lending partner, halting withdrawals.
- On November 28, the crypto lender BlockFi filed for bankruptcy. According to BlockFi, the liquidity problem was triggered by both coins locked on FTX’s platform and its exposure to FTX through loans to Alameda.
- Today, on-chain evidence points to Terraform Labs’ collapse in May 2022 as the initial cause of the events that led to FTX’s bankruptcy. This could mean that one epicentre of financial contagion, FTX, leads back to another source of the same, the TerraUSD, which lost its 1:1 peg with the UDS and wiped out $40 billion.
The (non)scary Domino effect
Over the past few weeks, we have seen a series of crypto price swings and market cap changes. These have caused some crypto giants to sell their assets and have sparked a debate over the relative merits of decentralising and centralising control over crypto. So is this the Domino effect?
The term “Domino effect” refers to the sequential repetition of events that happen rather soon following an unexpected event. The factors causing the Domino effect in the crypto landscape are crypto forking, ICO repercussions, and crypto offloading.
When a big crypto player experiences liquidity issues, it might have a cascading effect on the sector. The Domino effect is a chain reaction. It behaves erratically, following the course of action if you cannot manage the harm caused.
As a result, the only option to deal with the problem is to adopt the notion of “market rationalization,” which supports the features of market dynamics in tricky markets and price volatility.
How long will it take for the crypto market to recover
The aftermath of the FTX bankruptcy will be felt for some time, as investors’ faith in the exchange’s token and other crypto assets was shaken by the FTX news. But, on the bright side, it also emphasizes the value of self-custody and the risks associated with keeping your money on a centralized crypto exchange.
Law enforcement and crypto trading require regular updating to keep up with the rapid advancements in crypto. Even if the security of blockchain technology is always improving, as a trader, you must be well-informed before choosing to join a certain exchange. Although crypto is a secure form of payment, cybersecurity is just as important as the assets’ market value.
Now is the time for DeFi protocols to shine, as they remove authority from CEOs and place it in the hands of a decentralized community with no single point of failure rather than depending on a single corporation or a small number of influential people. Users should embrace decentralized finance, which will help keep their assets safe.
What’s more, I am on the same page as the CEO of Mercado Bitcoin exchange, who said that the “FTX collapse is not about problems in the ecosystem or the technology, but about a company that operated without governance, risk analysis, or any responsibility to its clients.” Of course, there is nothing wrong with blockchain technology and its development, and the crypto market is supposed to have its ups and downs. Currently, we’re experiencing the Domino effect in the bear market. Yet, keeping in mind that the crypto market is cyclical, the crypto spring is somewhere around the corner.
Concluding the comparison between the Mt. Gox crisis and the current FTX fallout, the “Mt. Gox bear market” from over ten years ago still outperforms the lows of 2022. In the months that followed the 2014 hack, Bitcoin lost up to 85% of its value relative to the ATH at that moment, bottoming out in January 2015, over a year after the breach. It took until December 2017 for another Bitcoin all-time high to occur. Perhaps, if the pattern persists, it means that in under 3 years, we’ll see a full recovery of the BTC price and new, all-time highs.
Once the market stabilizes, we will see more businesses looking to invest in crypto and adopt blockchain solutions.
If you’re wondering how INC4 is coping with the market, I have the answer. Since 2013, our team has been building blockchain, expertly navigating any crypto market conditions. For that reason, INC4 developers and project managers keep building and delivering new features to our existing projects, like PembRock Finance, the Open Forest Protocol, GYNN.io, Spaceport Docking Station, and others.
Bear markets or any market shocks cannot wipe out bull market adoption. And with developers being more active than ever, it is very unlikely that the crypto world will lay low for long.