The Fed's jumbo-sized rate hikes will uncover more 'skeletons in the closet' for crypto after FTX's rescue, economist says
- Rising interest rates will cause further casualties in the crypto space, according to the Peterson Institute's Martin Chorzempa.
- FTX announced Tuesday it agreed to be taken over by rival exchange Binance, shocking investors.
The Federal Reserve's aggressive interest rate hikes will likely flush further "skeletons" out of crypto markets, an economist warned.
The Pearson Institute for International Economics' Martin Chorzempa said that central bank tightening will likely cause further problems for major crypto companies after FTX announced it would be taken over by rival exchange Binance Tuesday.
"We can expect a lot more problems to come," Chorzempa told CNBC on Wednesday. "When rates come up, a lot of skeletons that have been waiting in the closet in highly-speculative, highly-levered markets tend to come out."
The Fed has hiked rates by an outsized 75 basis points at four consecutive meetings as it tries to bring surging inflation under control, and riskier asset classes have suffered as borrowing becomes more expensive and cash flow dries up.
Digital asset valuations have tumbled as the space remains stuck in a so-called "crypto winter," with bitcoin plunging 62% year-to-date.
That sell-off has led to some spectacular implosions, with Terra Labs' stablecoin and luna token both collapsing in May and Bankman-Fried's FTX suffering a liquidity crunch before eventually agreeing to be acquired by Changpeng Zhao's Binance exchange Tuesday.
The takeover is likely to lead to additional scrutiny of major crypto exchanges by watchdogs, according to Chorzempa.
"What's been surprising is actually how resilient the crypto and DeFi space has been after the blow-up of the Terra and Luna stablecoins but that wasn't necessarily going to last," he said.
"It's a very dangerous, speculative space with a lot of risk and the latest news is going to make regulators think a lot about whether they want crypto companies to be able to own important financial institutions as well."
The Fed hinted at its last meeting that it might be shifting to more gradual rate hikes from December onwards, but that's unlikely to provide relief for some of the tokens that have plummeted this year, Chorzempa said.
"It's hard to tell. It could always go down," he told CNBC. "One of the challenges is that there really isn't a good way to value anything in this space."
He added: "There's no discounted cash flow analysis you can do on tokens. That means it's all based on sentiment and social consensus, which can be very fragile as we're seeing."