Sophia’s Thoughts on the FTX Liquidations
Rumors have mounted that all of FTX assets may be liquidated this week. That sparked a sell-off that pushed Bitcoin below 25k USD briefly. Is there anything true to these rumors?
These are Sophia's Thoughts:
Tomorrow, a judge in the US will decide whether to approve a plan that would authorize FTX to liquidate its crypto holdings to pay back creditors.
The liquidations are voluntary, not mandatory. And they are capped at $200 million per week.
Fundamental analysis suggests that the liquidations may have a minor impact on crypto prices. Some coins, like Solana, might see the brunt of the shock. But they may spook investors and cool off sentiment.
Considering that this week will also include an update on inflation in the US, we are bracing for increased volatility.
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🚀 Last week’s market performance
For the longest stretch, the crypto market seemed poised to repeat another calm week. Then, on Monday, a sell-off took place. The crypto market lost 3.5% while Bitcoin (BTC) lost 4.2%.
The best performing coin even through the sell-off was DeFiChain (DFI). It gained 10.2%. DeFiChain has been on a bull run since the Cake Group announced the integration of Ethereum staking rewards in the DeFiChain ecosystem. The biggest loser of the week was ApeCoin (APE). It lost 15% amidst a weakening NFT market.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
🧑🏻🦱 FTX once again
On Wednesday, September 13, a US bankruptcy court will decide whether to approve FTX’s request to liquidate its assets to pay back its creditors. FTX filed for bankruptcy last year in November. It was an ugly sequence of events that revealed mismanagement of funds and misreporting of investments. FTX owes more than 3 billion USD to its top 50 creditors. It owes close to $9 billion to its customers through misappropriated assets.
The plan put forth by FTX primarily seeks to monetize the 3.4 billion USD in crypto assets held by FTX. One proposal made by FTX is to stake some of the assets to generate yield revenue that could be used to pay back creditors. Another proposal is to slowly sell off some of these assets. The proposal seeks authorization to sell between 100 and 200 million USD in crypto assets per week.
👻 The market got scared
It has been known since August that FTX would seek authorization to liquidate its assets. But the market only reacted to this news this week. On Monday, September 11, the crypto market lost 3% in a single day. Bitcoin (BTC) fell below 25,000 USD, hitting a three-months low before it recovered. Solana (SOL) lost more than 6%.
Individual investors appear to be reacting with unease to the news. Crypto market sentiment, as measured by Sophia from online news and social chatter, shifted downward last week. And the search frequency for FTX on Google almost doubled over the course of the week. It is clear that the FTX liquidations are in the minds of investors right now.
🔎 What can really happen?
The market may have gotten spooked with the news about the FTX liquidations. But it is important to keep in mind that FTX may not be able to liquidate all of its assets at once. To liquidate 3.4 billion USD in crypto assets at a pace of $150 million per week, it would take FTX 23 weeks to sell off all of their assets. This will be a paced process that may not affect the market all at once.
Financial economic research has demonstrated that the price impact of a large trade approximately follows a square-root law. That is, the price shift that may be caused by a large trade is proportional to the square root of the ratio of the size of the trade over the volume of the market. The proportionality factor for crypto is approximately 0.9-times the volatility of the asset. The price impact formula suggests that the complete & slow-paced sell-off of FTX’s assets would drag the crypto market down by 0.15% per week. This seems rather minor considering the large volatility of crypto markets.
However, FTX holds concentrated positions in some coins. The largest fraction of FTX’s portfolio is in Solana (SOL). And Solana has much larger volatility than the market. So the anticipated price impact on Solana is larger than on other coins. This may explain the large decline that Solana faced on Monday.
🎢 A volatile week ahead
Fundamental analysis suggests that the impact of a slow-paced liquidation of FTX’s assets may only have a minor impact on crypto markets. However, sentiment also plays an important role. If approved, the liquidations may trigger panic in the market. That could lead to an additional sell-off. Similar thoughts have been expressed by several people on social chatter.
There are also additional events taking place this week that may contribute to the performance of the crypto market. In particular, we will get new data on inflation in the US. That may influence the decision of the Fed to further raise interest rates in the US by the end of the month. While most do not expect such a raise in September, unexpectedly high inflation may throw this consensus into question.
One thing is certain: this week will be volatile. Much more volatile than past weeks have been in the crypto world.
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