The crypto market is having a no good, very bad week.
This week’s crash brings a sudden reversal after weeks of relative stability for bitcoin and ethereum prices. Both tokens are now down more than 20% over the last week, driven by fresh investor skepticism and souring sentiment on the heels of Binance’s announcement that it would buy out rival FTX, after concerns over FTX’s liquidity were raised. (Spoiler alert: Binance decided not to acquire FTX after all.)
In light of all the news, bitcoin’s price continued to plummet, falling below $16,000 for the first time in two years late Wednesday afternoon. Ethereum is seeing a similar downturn, falling below $1,200 for the first time since crypto’s crash over the summer. The token continues to tank, getting dangerously close to falling below $1,100, as of Wednesday afternoon.
While bitcoin and ethereum prices have remained low compared to last year, both tokens had been relatively steady, even in the face of Fed rate increases, tumbling foreign currencies, the continued war in Ukraine and stock market crashes.
“For a long time, bitcoin has aligned itself with broader risk appetite in the markets but it goes without saying that Tuesday was not one of those days,” said Craig Erlam, senior market analyst at Oanda. “Cryptocurrencies have been pummeled at the start of the week with bitcoin down almost 20% in two days at one stage amid concerns over FTX and the implications for the FTT token.”
So, why is crypto tanking after nearly a month of stability? Let’s dig in.
Why Is Crypto Crashing?
The crash is likely due to the unfolding drama happening at FTX, a popular crypto exchange. As a result of a significant liquidity crisis at FTX, Binance CEO Changpeng Zhao announced that Binance would acquire FTX. Binance is the world’s largest centralized crypto exchange, and FTX was one of its biggest competitors. But shortly after introducing the deal, Binance announced late Wednesday afternoon that it would scrap its plans and will not acquire FTX, sending further shockwaves through the market.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance said on Twitter.
Many investors have become disheartened following the news of FTX’s collapse. The popular exchange’s founder, Sam Bankman-Fried, previously hailed as a “white knight” of the crypto industry, has now lost more than 94% of his wealth in a single day, according to Bloomberg.
“Today is a bad day in crypto,” says Edward Moya, a senior market analyst at Oanda. “Binance had to step in to save Sam Bankman-Fried’s FTX crypto exchange. [He] has been the white knight during this crypto winter and a liquidity crunch from him has triggered a wave of uneasiness across the cryptoverse.”
The terms of the deal haven’t been announced yet, but investors are already wary of the kind of attention this will draw from regulators. The SEC reportedly will expand its investigation into FTX focusing on potential securities law violations, according to the Wall Street Journal.
Moreover, the swift crash of one of the world’s largest and fastest-growing crypto exchanges within days (when no red flags appeared to be present) is infusing further skepticism in an already battered market during a year of economic turmoil.
What Does This Mean for Crypto Investors?
The collapse of FTX highlights the risks of investing in the crypto market. One day you’re cruising, the next you’re running to pull your money out in a classic bank run. Crypto isn’t insured by the federal government through FDIC insurance, and, like many other exchanges, FTX’s insurance policies only covers some crime events, including theft and fraud. That means there isn’t any insurance coverage just because the exchange goes under.
FTX has halted all withdrawals and the onboarding of new customers, in addition to strongly advising customers from depositing money into the exchange. What happens next is unclear, partly because what happens next with FTX is unclear — even FTX CEO Bankman-Fried said he doesn’t know in a Twitter thread. Another component complicating the situation is that, allegedly, all of FTX’s liquidity problems don’t extend to its US-based exchange, according to Bankman-Fried.
Bankman-Fried also reportedly told investors that without a cash injection into the company, FTX will likely need to file for bankruptcy, according to Bloomberg. What happens with investors in the event of a bankruptcy is usually governed by a company’s terms of service and/or its user agreement, but neither of FTX’s agreements make mention of that. Because this is a developing situation, FTX investors will need to wait and see what happens. One thing is for sure: If you’re given the opportunity to withdraw your funds, don’t hesitate.
If you aren’t an FTX customer, but hold crypto elsewhere, experts recommend you hold tight. If you’ve invested in crypto for the long-term using a buy-and-hold strategy, price swings are to be expected and big dips are nothing to be overly worried about. Now is a good time to read up on your exchange’s or wallet’s insurance policy, and, based on what you find, you may consider moving your crypto into a personal wallet. There is one carrier that includes direct-to-consumer offerings: Breach Insurance. Breach’s “Crypto Shield” is the first regulated insurance product for crypto investors.
Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio and to only invest what you’re OK with losing, as long as your crypto investments don’t stand in the way of your other financial goals. Always prioritize saving for an emergency, paying off high-interest debt, and contributing to a traditional retirement plan before ever investing in crypto. If you’re a good spot financially and ready to enter the market, experts say now may be a good time to buy bitcoin or ethereum while prices are low, keeping in mind that prices could fall down more.
