The FTX fiasco could spark an industry meltdown - and slash bitcoin's price by 25%, JPMorgan strategists say
- FTX's financial woes are likely to transform the crypto industry, JPMorgan strategists said.
- They predicted a wave of margin calls, and a shortage of industry saviors.
The FTX fiasco threatens to wreak havoc on cryptocurrency firms and transform how they're run, JPMorgan strategists have said.
It's also likely to send the price of bitcoin down 25%, and create a dearth of saviors for struggling firms, they predicted.
Crypto players are likely fielding demands from lenders to put up more collateral, and some may collapse under the pressure, a team led by Nikolaos Panigirtzoglou said in a research note on Wednesday.
"It looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting," the Wall Street analysts said.
They underscored the close links between Sam Bankman-Fried's digital-asset exchange FTX, his trading firm Alameda Research, and the wider crypto space.
Concerns about FTX's financial health have sparked the equivalent of a bank run in recent days, forcing Bankman-Fried to reach out for help. Binance initially agreed to acquire his company, but the leading crypto exchange backed out after reviewing FTX's finances, reports say.
Bankman-Fried had been heralded as the white knight of crypto, and even compared to Warren Buffett, who injected much-needed cash into several ailing companies during the last financial crisis. However, the FTX boss now appears to be the one in need of aid, leaving few obvious candidates to serve as industry saviors.
"The number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem," the JPMorgan strategists said.
The sudden onset of problems at FTX, which had appeared to be in rude financial health, came as a surprise. That "creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue," the team said.
Panigirtzoglou and his colleagues suggested it could take several weeks for the crypto turmoil to settle down, unless FTX is quickly rescued. Bitcoin has already plunged 65% to below $17,000 this year, and could bottom out around $13,000, they said.
"With the crypto market cap standing at just above $1tr before the FTX/Alameda Research collapse, our guess is that the crypto market will find a floor above $500bn in the current deleveraging phase," they added.
A positive outcome from the current chaos could be a safer, more transparent crypto ecosystem, the JPMorgan analysts believe.
Its team predicted crypto players will face more pressure from investors and regulators to disclose their finances, protect client assets, and diversify their portfolios. Funds are also likely to manage their risks more carefully after witnessing the potential fallout from reckless behavior, they added.
Commentators have warned about dangerous amounts of debt and excessive risk-taking in the crypto industry before.
"The problem with #crypto, as in most things, is the leverage," Michael Burry, the investor of "The Big Short" fame, tweeted on Wednesday.
"If you don't know how much leverage is in crypto, you don't know anything about crypto," he added, repeating a caution he first delivered in June 2021.