- FTX’s liquidity crisis shows how debt is toxic to crypto, according to Tether co-founder William Quigley.
- Quigley pointed to companies taking on massive amounts of debt in 2021, which spurred more volatility in the industry.
- “It just violates a basic principle of finance; you don’t lever up highly volatile assets,” Quigley said to CNBC.
The liquidity crunch that toppled FTX shows that debt is toxic for cryptocurrency, and investors shouldn’t be piling leverage on top of of highly volatile assets, according to Tether co-founder William Quigley.
“Everyone thought that the major exchanges were not susceptible to any kind of serious meltdown. And once again, we keep going back to whether it’s 3AC, or Voyager, or Celsius or Luna, and it’s the matter of debt. Debt is toxic with crypto,” Quigley said in an interview with CNBC on Wednesday, commenting on the recent fall of Sam Bankman-Fried’s crypto exchange.
Bankman-Fried, who had himself bailed out other troubled crypto firms this year, sent markets reeling after announcing FTX would be acquired by Binance due to a “significant liquidity crunch”. That caused the price of FTX’s native token to plunge 94% and sparked fear of more contagion within the industry – similar to that of earlier this year when the fall of stablecoin Terra and the associate Luna token led to a cascade of bankruptcies throughout the industry.
Quigley believed volatility was introduced into the crypto ecosystem amid the bull run of 2021, when firms began to take on massive amounts of debt.
“And it just violates a basic principle of finance; you don’t lever up highly volatile assets,” Quigley said. “When Wall Street came into this market last year big time … I think one of things they dragged in was their fascination with leverage,” he later added.
Bankman-Fried gained exposure to some of that debt by offering multi-million credit lines and credit injections to various crypto firms, like the now-defunct Voyager. He told Reuters in July that FTX had “a few billion” more to help struggling firms in the industry.
Quigley added that FTX’s liquidity issues could have stemmed from the “grave mistake” of using a self-issued token as collateral, which opens the door to market manipulation.
Questions about the balance sheet of Alameda Research, Bankman-Fried’s crypto trading firm, ultimately sparked the the whole debate about FTX’s solvency, with the trading firm’s assets heavily comprised of FTT tokens. “It was never really clear how the balance sheet operated between the two of them,” Quigley said.
He added contagion could spread depending on how much FTX was leveraged, though some damage has already been inflicted on other players in the industry. The global market cap of the crypto industry dropped 12% on shortly after announcement of the acquisition on Tuesday, with Bitcoin sliding as much as 14% and ether falling by 17.5%.