The Contagion From FTX’s Insolvency Goes Global as Bitcoin Miners Prepare to Capitulate

Rohail Saleem

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

The embattled crypto exchange FTX appeared destined to become insolvent yesterday when Binance declined to infuse some much-needed cash into the ailing entity, dragging the entire crypto sector as well as high-beta US growth stocks into the proverbial shitter. While a ray of hope for FTX has since then emerged, the underlying dynamics for Bitcoin and other cryptocurrencies continue to deteriorate as negative momentum is now unleashing a cascade of second-order effects.

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Let’s start with the good news. Justin Sun, the founder of blockchain-based, entertainment-focused digital platform Tron, has tweeted that his firm is currently working with FTX to come up with a “solution” to the exchange’s liquidity shortfall and devise a “pathway forward.” Sun went on to note in a separate tweet:

“My team has been working around the clock to avert further deterioration. I have faith that the situation is manageable following the wholistic [sic] approach together with our partners. Stay tuned.”

Before discussing how Bitcoin is affected by this malaise, let’s go over the basic facts of the FTX saga. For those who might be unaware, FTX essentially suffered a bank run when Binance announced to dump its holdings of the FTT token due to the outsized exposure that Alameda Research – the trading arm of FTX’s founder Sam Bankman-Fried (SBF) – maintained to this synthetic coin on its books, which, according to Binance, amplified the risk around the FTT ecosystem. Bear in mind that FTX incentivized its users to hold the FTT token by offering attractive discounts on trading fees along with a host of other rewards. The exchange maintained FTT’s value by using a third of its trading commissions to buy back FTT coins, which were then burnt. In reality, FTX and Alameda were running a Ponzi scheme where Alameda was able to acquire FTT coins at very cheap prices (through pre-mining, etc.) while FTX artificially inflated the coin’s price via regular burns. Alameda then posted its FTT holdings as collateral to borrow around $6 billion in FTX client funds. These client funds were used by Alameda to place leveraged bets. However, the gameplay ended when Binance’s decision to dump FTT unleashed cascading liquidations that pummeled the coin’s price. With Alameda’s collateral crashing and FTX experiencing elevated withdrawal requests, the exchange has found itself on the brink of bankruptcy.

FTX now needs a cash infusion of around $8 billion to remain solvent. The exchange has also paused all onboardings and withdrawals.

It was the fear of contagion that unleashed the initial lower leg in the price of Bitcoin. And these fears remain justified. ZeroHedge has compiled a comprehensive list of entities with exposure to FTX. For instance, Sequoia Capital has now written off its $210 million stake in FTX. Other investors include the Japanese giant SoftBank, Singapore’s Temasek, BlackRock, Ontario Pension Fund, Tiger Global, Circle, Paradigm, Ribbit, MultiCoin, VanEck, Thoma Bravo, Alan Howard, etc. All of these entities will have to write off their FTX stake in the event the exchange goes under.

As other manifestations of contagion, Solana is getting hammered due to its close association with SBF. Moreover, Tether and Tron’s stablecoin USDD have lost their $1 pegs.

Bitcoin hit the $15,000 price handle yesterday. Bitcoin’s price has now fallen below the average electrical cost to mine the world’s premier cryptocurrency. These depressed prices are creating acute pain for Bitcoin miners, who now face the difficult choice of either shutting down operations or dumping their Bitcoin holdings just to keep the lights on. The fear continues to grow that a broad-based miner capitulation will send Bitcoin into a tailspin, forcing the cryptocurrency toward the $13,000 price level. Some now suggest that Bitcoin can go even lower, perhaps below $10,000.

Source: Cbonds

These fears are already having a sizable impact on countries such as El Salvador, which maintain elevated exposure to Bitcoin. Consider the fact that the yield on El Salvador’s 7.75 percent 2023 bond just hit the highest level since the early summer crypto carnage. This is despite the fact that China has reportedly offered to buy all of El Salvador’s foreign debt.

Today’s situation is similar to Bitcoin’s previous cyclical lows that were created as a result of the fallout from Mt Gox and Bitmex sagas. Exchanges going under have become a predictable hallmark of a cyclical bottom for Bitcoin.

This line of thinking is now inviting a buy-the-dip mentality in Bitcoin, as illustrated in Santiment’s tweet above.

Where do you think Bitcoin’s cyclical bottom lies? Let us know your thoughts in the comments section below.

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