FTX Collapse Another Blow For The Reeling Crypto Market, To Have Ripple Effect On Industry

From the sharp fall in the price of Bitcoin to the crash of Luna, the year 2022 has been a difficult one for cryptocurrency investors across the world. As if this pain was not enough, the crash of cryptocurrency exchange FTX has added to the woes of the crypto market, disrupting the recovery it was making over the last few months. 

The FTX crash will also hit the Indian crypto investors. As per industry estimates, the Indian crypto market has around 25 Mn investors. Among these, around 5 lakh investors, who own FTX’s native token FTT, have been directly impacted by the crash, industry experts told Inc42. 

Indian crypto exchanges such as BuyUCoin and WazirX also had FTT token listed on their platform. However, the tokens didn’t make up more than 5% of traders’ portfolio in BuyUcoin, said Shivam Thakral, CEO of BuyUcoin. 

“The FTT crash has had a global impact on crypto prices and volumes. Indian exchanges have seen a similar impact on retail user sentiments. Traders are expecting the FTX fallout to create a bottom for the prices and global regulations will be the way to move forward,” he added. 

The fall started after the poor financial condition of the crypto trading firm Alameda Research, the parent company of FTX, came to light following media reports. The value of FTT has fallen over 80% in six days to less than $3. Following the news about FTX, the overall cryptocurrency market cap plunged 20% in a week to $824 Bn from $1.02 Tn. 

To put things into perspective, FTX was founded by billionaire Sam Bankman Fried. Crypto exchange Binance was among the first investors in FTX, with both the exchanges entering into a partnership in 2019. Later, Fried bought out Binance’s stake in the company. However, some part of the deal was paid in FTT tokens.

As media reports about the weak financial condition of Alameda Research emerged, Binance CEO Changpeng Zhao said he would sell all the FTT tokens he owns, which alarmed investors and led to panic selling. Later, Zhao also expressed his willingness to rescue the troubled exchange and announced a non-binding agreement, which was later called off. 

Following withdrawals of funds worth about $6 Bn within a few days, FTX decided to halt all withdrawals on the platform. With a ripple effect of this crisis, the prices of other crypto assets such as Bitcoin, Dogecoin, and Solana have also gone down, leading to an overall bearish sentiment in the crypto market.

As the withdrawals remain disabled on FTX, there is no guarantee at the moment that the users will be able to get back their funds. 

“The near collapse of FTX is one of the darkest incidents in the crypto industry this year, with a loss of over $2 Bn in value in FTT token and wiped approximately $100Bn (~10%) from crypto market cap. As disheartening as this news is for the ecosystem, retail users got badly impacted by this occurrence,” Mahin Gupta, founder of digital asset management platform Liminal, told Inc42.

Experts Caution Retail Investors

According to Tarusha Mittal, COO and cofounder of group staking platform UniFarm, the crypto market is highly volatile and retail users should exercise utmost caution in choosing the cryptocurrency to invest in. Users should keep their portfolios diversified to minimise losses and evaluate their risk appetite regularly.

“Retail investors are advised to stay away from buying the dip in FTT tokens to make quick money as the recovery of FTT tokens might be a slow and lengthy process, or the recovery may not happen at all. It is also advised not to park your entire capital on exchange wallets as it may affect your liquidity in case withdrawals are frozen by the exchange,” Mittal said.

While planning to store funds with custodial exchanges, investors should look for exchanges or custodians who are regulated and licensed, Liminal’s Gupta said.

Additionally, it is important to set up two-factor authentication, along with asset allocation and whitelisting of assets, while using custodial accounts to have an additional layer of protection, Gupta said.

FTX Crisis Causes Distrust In Investors

 The FTX meltdown has created distrust not only among retail investors but also institutional investors, said Sharat Chandra, cofounder of India Blockchain Forum. New investors trying to enter the market will also think twice after this crash, he added.

It is not certain how much time investors will need to wait to get back their money. At this moment, full disclosure and transparency are needed from exchanges on their holdings to bring trust among investors, Chandra said.

According to Amanjot Malhotra, country head-India of crypto exchange Bitay, a lot of retail investors might become inactive for a while due to the current volatility in the crypto market. On the other hand, institutional investors might like to capitalise on discounted assets to hedge their investments.

“As recent events have shown, when things go down, there are spillover effects in the wider market. The intense selling pressure that we are seeing on Solana is a case in point. This market-wide volatility could have been avoided had the exchange and trading firm involved done their fiduciary duties responsibly,” Ashish Singhal, CEO of Coinswitch Kuber, said.

According to Sidharth Sogani, CEO of crypto analytics firm CREBACO Global, the FTX crash will have a huge negative impact on the crypto industry and set it back by few years. 

Binance and FTX were considered to be the most trusted exchanges. With FTX, the second-largest crypto exchange in the world, filing for bankruptcy, thousands of investors have lost their wealth and trust, Sogani added. “Unfortunately, people have not yet understood the importance of ‘not your keys not your coins'”, he said.

“Frauds and hacks will happen till the time people trust a third party to handle funds. Education about how the Web3 space works is necessary,” he added further.

FTX Fiasco To Add To Worries Of Regulators 

Governments and regulators across the world are concerned about the crypto industry, and the FTX crash will only add to these concerns.

In India, there is regulatory uncertainty about the industry, and the FTX case may pave the way for more stringent regulations which can impact innovation in the space, according to experts.

It must be noted that major crypto exchanges such as Coinswitch Kuber, CoinDCX, and WazirX are already under the radar of the Enforcement Directorate (ED) as part of its various investigations in money laundering by individuals and entities.

Meanwhile, the Reserve Bank of India (RBI) has been a staunch opponent of private cryptocurrencies. It has also launched a central bank digital currency (CBDC) for the wholesale segment, and plans to launch CBDC or digital rupee for the retail segment as well. With CBDC, the central bank is further aiming to bring down the use of and investments in cryptocurrencies.

Amidst all these, experts have called for clear regulations for the crypto industry in India. “Regulation should be fast tracked. India is taking over the G2O presidency and making a strong case for global consensus to regulate crypto…and so it does not impact the growth of the industry,” India Blockchain Forum’s Chandra said.

Earlier this year, the decision of crypto platform Vauld to suspend operations raised questions globally about protection of interests of retail crypto investors. The sharp fall in crypto market in 2021, followed by a difficult 2022 and the latest FTX crash has further raised concerns about investors’ assets and questions if the industry would be able to come out of this fall and regain the trust.