Crypto exchanges expect a dip as FTX liquidity woes crash market

On Tuesday, Sam Bankman-Fried, chief executive of US-based cryptocurrency exchange FTX, tweeted that the company reached a “strategic transaction” with Binance, under which the latter would acquire all non-US assets of FTX. The move, which Binance founder Changpeng Zhao detailed as a “non-binding letter of intent” to “help cover liquidity crunch”, sent the valuations of most of the prominent cryptocurrency tokens crashing. Now, experts believe that the crash could further dent an already ailing cryptocurrency industry in India.

On Tuesday, FTT, the crypto token of FTX’s exchange, saw its value being depleted by over 80% — falling to as low as $3.77 at the end of Tuesday. While it has remained at around the same value through Wednesday, its crash echoed the drastic demise of stablecoin project Terra in May this year — which saw the stablecoins linked to the Terra blockchain lose more than 99% of their valuations.

Ether, which started Tuesday at around $1,575, was trading at around $1,200 at 4PM on Wednesday — marking a drop of almost 24% within less than 48 hours. BTC, the official token of the Bitcoin blockchain, was trading at around $17,630 at press time, down by over 14% from $20,660 at the start of Tuesday.

Most other tokens that are publicly traded across exchanges around the world have declined similarly. A spokesperson for homegrown web3 startup, CoinDCX (which also operates an exchange), said in a statement that the crash pulled the global cryptocurrency valuation below $1 trillion — after a run of around six weeks that saw BTC reclaim the $20,000 level and global valuation cross $1 trillion.

To be sure, at its peak of market valuation in February this year, the global cryptocurrency industry was valued at over $3 trillion.

“There will be some downward impact of the market crash due to FTX. The main issue here is that FTX used its investor money and kept its own token, FTT, to raise debt and fund its own investments. As a crypto exchange, this always leads to a liquidity risk, which FTX should have been aware of,” said Sathvik Vishwanath, chief executive of homegrown crypto exchange, Unocoin.

Vishwanath added that there have been liquidity issues in the Indian crypto exchanges, and the latest crash may add to the same as well — at least momentarily.

“Trading volumes showed some signs of recovery in the past six weeks, but the latest crash is likely to halt this progress. However, we do not expect this market dent to be a very prolonged one, and even if BTC does not reclaim its $20,000 level, we should see the global crypto tokens reclaim at least half of the valuation that it lost over Tuesday and Wednesday due to FTX’s crash,” he said.

Others, however, were not too bullish.

Sidharth Sogani, chief executive of crypto market research firm Crebaco, said that India has been struggling with falling trading volumes since July, and the low base volume of crypto trading in India means that the market impact would not be too sharp.

“The lack of regulations, coupled with the bear market, means that India would not see a major impact as a result of the latest crash. On overall terms, the bear market trend will likely remain at least until March next year, and BTC may even fall to around $14,000-15,000, before showing signs of recovery again,” Sogani added.

To be sure, crypto trading volumes took a nosedive after the union government imposed a 30% capital gains tax on profits, as well as a 1% tax deducted at source (TDS) rate that came into effect from July 1. According to data sourced from Crebaco, the average daily trading volume on homegrown crypto exchange WazirX since July 1 (until Tuesday, November 8) is $1.93 million — down 81% from $10.2 million daily average in June this year.

On fellow exchange CoinDCX, the figure is presently $1.84 million — down 78% from $8.23 million in June.

On Tuesday itself, though, India’s exchanges did not see a proportionate impact — a factor that experts put down to the time difference between the US and Indian markets, as well as an already-weak crypto market here. WazirX and CoinDCX noted trading volume of $1.61 million and $2.61 million, respectively, on November 8.