FTX Contagion Hits Crypto Stocks Following Binance Buyout

Digital asset markets are reeling from revelations that top exchange Binance may soon gobble up its major rival FTX, causing havoc among crypto stocks.

On Coinbase, bellwether crypto bitcoin fell 15% to $17,500 on Tuesday afternoon, its lowest point in almost two years. Number-two ether dropped by 22% at its worst while Binance’s native token BNB shed 12%. 

Most top tokens have recovered slightly since their local lows. Still, the crypto market has shaved 10% from its total capitalization over the past 24 hours, breaking below the $1 trillion mark and representing $100 billion in nominal losses.

More than 69% has been wiped from a peak of $2.97 trillion witnessed 12 months ago, with roughly $1.9 trillion lost year to date. By comparison, the bursting of the dot-com bubble at the turn of the century erased $1.7 trillion from equities markets, although adjusted for inflation that figure would be closer to $3 trillion.

Most of the sources Blockworks spoke to agree — the past 24 hours have been “insane.”

Core Scientific, one of the largest publicly listed miners, plummeted nearly 16% on Tuesday, the worst hit among bitcoin mining stocks, followed closely by Hong Kong rival Bit Mining. Core Scientific did however regain 3% during pre-market trade on Wednesday.

Hut 8 Mining Group and Digihost Technology both tumbled 12%, while Marathon Digital gave up 5% and a further 5% in the early morning session.

Surprisingly, New York-based Stronghold Digital managed to brace the impact climbing 2% on the day to finish up at $0.83 per share. The stock has however given up those gains and then some this morning.

Coinbase, practically the only pure-play crypto exchange that’s publicly-listed, took a 11% hit on Tuesday and another 5% during pre-market. Robinhood, the controversial discount brokerage which also supports crypto trading, tanked 19% to $9.74 and remains somewhat steady leading into today’s session.

Both Coinbase and Robinhood have experienced shrinking trade volumes, contributing to reductions in their workforces this year, alongside both crypto-native firms and tech giants.

For scale, the tech-heavy NASDAQ 100 rose nearly 1% on Tuesday while the broader S&P 500 gained more than half a percent.

Crypto bank Silvergate hardest hit among digital asset stocks

Digital asset managers Galaxy Digital and Bakkt Holdings sank 17% and 2.5% respectively on the day, with the latter falling another 2% during pre-market. 

Both stocks have slumped by about 80% of year to date. Digital asset financial services firm Eqonex, a nano-cap stock which shuttered its exchange operations in August, also dropped nearly 9% on the day to $0.40.

Galaxy, spearheaded by Wall Street maverick Mike Novogratz, is rumored to be cutting its workforce by 15% following a $555 million net loss posted for the second quarter. Galaxy’s third-quarter earnings call is slated for Wednesday at 8:30 am ET.

Crypto custodians Silvergate and Signature Bank each ended more than 22% and 4% in the red, now down 73% and 57% respectively this year. Silvergate was the worst performing crypto-related stock on Tuesday of the 50 Blockworks analyzed. It fell an additional 7% during pre-market.

San Diego-based Silvergate, which collects demand deposits from crypto infrastructure providers and exchanges, posted a loss of $13.5 million in third-quarter deposits compared to Q2.

Software company (and pseudo bitcoin ETF) MicroStrategy wasn’t far behind, sliding 20.5% and another 8% before Wednesday’s open. MicroStrategy owns 130,000 BTC ($2.31 billion), acquired for nearly $4 billion at an average of $30,639 as of late September, putting its paper losses at around 40%.

Elon Musk’s automaker Tesla, which held 9,720 BTC ($172 million) per its latest disclosures, tumbled 3%, although it’s more likely the stock was impacted by Musk dumping $3.9 billion in company stock following his buyout of social media platform Twitter.

The negative price action across crypto stocks amounted to hurting digital asset ETFs. Bitwise’s Crypto Industry Innovators ETF (BITQ), which is weighted considerably towards MicroStrategy, Coinbase and Silvergate, stumbled 10%.

Crypto industry caught off guard by FTX collapse

The volatility felt Tuesday is reminiscent of past events this year following a contagion that had gripped some of the industry’s largest lenders including Celsius Network and Voyager Digital — now undergoing bankruptcy proceedings.

With public speculation mounting over whether FTX rehypothecated client crypto to bail out its sister firm Alameda Research in Q2, investors are fleeing for the exit. Users have decided against the risk of keeping their crypto on FTX and have decided to pull their funds.

Despite the leak of Alameda’s alleged partial balance sheet late last week, most in the industry have been caught off guard. Developments have escalated quickly and within a few days FTX CEO Sam Bankman-Fried could soon be forced to sell.

Questions remain as to why FTX —- which was valued as much as $36 billion at its last funding round just nine months ago — is grasping at a bailout from its biggest rival. Proponents are now asking whether FTX deployed its customer and partner capital to fund other ventures.

“In general, it’s poor practice for exchanges to be utilizing their customers’ tokens for other purposes, which exposes said tokens to unnecessary risk,” CoinGecko’s co-founder Bobby Ong told Blockworks.

Exchanges should strive to have customer tokens fully custodied, with the totals and wallet addresses made transparent for public scrutiny, he said. “All crypto exchanges should do Merkle-tree proof-of-reserves,” Binance’s CEO Changpeng Zhao tweeted Tuesday. 

Read more: What Is Proof of Reserves and Can It Build Back Trust?

“Banks run on fractional reserves. Crypto exchanges should not.” The Binance head said his exchange would start to implement proof-of-reserves “soon” in an attempt to provide “full transparency.”

Tony Chapple, head of trading at Australian digital asset firm Zerocap, told Blockworks that the event will escalate consolidation through the crypto space, which he reckons had been on the cards for a while.

“Consolidation to firms with proven ability to control their balance sheet risk and employ economies of scale will be the long-term winners here,” Chapple said.

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