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Crypto faces a serious risk of broader contagion as FTX collapses and it's unclear how deep it will go, Citi analyst says

Nov 13, 2022, 20:13 IST
Business Insider
A big screen display of stock prices hangs behind traders working at the New York Stock Exchange NYSE on May 9, 2022.Michael Nagle/Xinhua via Getty Images
  • FTX filed for bankruptcy on Friday, and Citi analyst Joseph Ayoub warned of broader risks to the crypto sector.
  • "I think there's a serious risk of broader contagion to the ecosystem itself," he told CNBC on Friday.
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The overall cryptocurrency market faces risks of contagion as Sam Bankman-Fried's FTX files for bankruptcy, according to Citi analyst Joseph Ayoub.

"I think there's a serious risk of broader contagion to the ecosystem itself," he told CNBC on Friday. "I think it's unlikely that contagion spreads toward broader financial markets, and that's mainly because the size of the crypto space, which is only around $830 billion in comparison to the $43 trillion US equity market."

Companies in the sector will face renewed skepticism and trust in the fallout of FTX's collapse, Ayoub added, but it also means other firms can move to capture more market share now that one of the biggest players has gone under.

On Tuesday, Binance agreed to a tentative agreement to bail out FTX, but a day later it backed away from the deal. FTX failed to secure other investors for a rescue, resulting in the Chapter 11 bankruptcy filing. Bankman-Fried also stepped down as CEO.

Meanwhile, the extent of the fallout from FTX's troubles on the rest of the cryptocurrency sector remains to be seen.

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"Within cryptocurrencies, it's unclear as to how far and how deep this goes," Ayoub said. "Contagion can last for a significant amount of time, and with the amount of companies that are involved and the amount of investments involved with FTX, and following Chapter 11 it could take a long time for this to resolve."

Without a clear backstop to limit further contagion, he maintained, the FTX crash differs from the 2008 financial crisis when the government stepped in with a massive cash injection and bailed out Wall Street.

But there is no central bank for crypto, though FTX's bailouts of BlockFi and Voyager Digital earlier this year drew comparisons to a lender of last resort.

"It almost seems ironic now that we were previously thinking that Sam Bankman-Fried and FTX were providing some sort of lender of last resort optionality... and now it seems there is no significant lender of last resort," Ayoub said.

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