Sam Bankman-Fried, the billionaire founder of FTX, one of the world’s most liquid cryptocurrency exchanges, is warning of more havoc in the crypto market, revealing that several periphery exchanges are “secretly insolvent”.
Some Exchanges Have Gone “Too Far”
In a recent interview with Forbes, Sam, whose exchange and venture capital arm, Alameda, offered $750 million in credit lines to BlockFi and Voyager Digital, two crypto firms who had exposure to the humongous debt from the technically insolvent Three Arrow Capital (3AC), revealed that some exchanges have “basically gone too far” and won’t be “practical to backstop them”. While he failed to name names, the crypto influencer said these ramps have huge holes in their balance sheet, may face regulatory issues, and there would be no business to salvage.
There are companies that are basically too far gone, and it’s not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues, or that there is not much of a business left to be saved.
The Crypto Dump
As of late June, the crypto market is under immense selling pressure. According to trackers, the total market cap stands at around $900 billion, down from around $2.3 trillion in November 2021, when crypto assets, including Bitcoin, roared to all-time highs.
The dump in crypto valuation has been subsequential to the broader crypto market, leading to some exchanges initiating safety measures to safeguard their cash flow. Although Sam says there are periphery exchanges that are underwater and have failed to make their position public, top exchanges like Coinbase and Gemini have announced hiring freezes.
Bears are Exposing “Naked Swimmers”
With the markets failing to recover and push higher, the falling tide would likely expose even more exchanges and crypto firms, swimming naked, as Warren, the billionaire investor, once said.
Considering the state of cryptocurrency regulations and how trading is a global phenomenon, clients would be the ones bearing the brunt. Clients with accounts in exchanges operating in cryptocurrency-receptive jurisdictions with stringent compliance rules and insurance funds as a backstop against insolvency will likely find reprieve. Others, however, would have to bear losses, further heaping pressure and scrutiny on crypto.
- Exhange BlockMagnates: Photo by Alexander Popov on Unsplash