FTX’s collapse, and resulting Chapter 11 filing, has taken a hefty toll on cryptocurrency assets in the past week, sending the price of bitcoin (BTC-USD) down 21% and losing almost $82B in market cap since Nov. 6.
J.P. Morgan strategists, led by Nikolaos Panigirtzoglou, said this new phase of crypto deleveraging, triggered by the collapse of FTX and its sister firm Alameda Research, is problematic because “the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem.”
As a result of FTX’s collapse, investors and regulators are likely to pressure crypto businesses to disclose more information about their balance sheets, to safeguard client assets, and to limit asset concentration. Meanwhile, crypto market participants are likely to adopt more diligent risk management, including managing counterparty risk, the J.P. Morgan strategists said.
They expect it to take several weeks for the deleveraging cycle to peak, but the “hit to crypto market cap is likely to be smaller than post-Terra given advanced deleveraging taken place before the Alameda/FTX collapse,” Panigirtzoglou and colleagues said.
“FTX’s bankruptcy will be a classic example of ‘short-term pain, long-term gain’,” said GlobalData analyst Suneet Muru. “It will deflate the crypto market cap over the next few months, but will force exchanges to realign their business models toward effective risk management.” The analyst also said exchanges must show that they’re not the same as banks and need to keep far less of their own cryptocurrencies on their books.
The price of bitcoin (BTC-USD) could decline 25% from Nov. 9 (when the note was written; BTC price was ~$17.6K0), the J.P. Morgan strategists said. When looking at the potential downside, the bitcoin production cost has historically acted as a floor for the token’s price. “At the moment, this production cost stands at $15K but it is likely to revisit the $13K low seen over the summer months implying a decline of around 25% from here,” they said.
Morgan Stanley strategists Sheena Shah and Kinji Steimetz agreed that there’s still too much leverage in the crypto ecosystem. “We are in the midst of another deleveraging event in the crypto ecosystem and it is so far having limited spillover to broader equity markets beyond sentiment, as crypto institutions lent to each other,” they wrote in a note to clients.
They expect another round of crypto quantitative tightening, “with creditor exposures revealed in coming weeks. These creditors are currently selling crypto assets to cover risks, adding to volatility,” the Morgan Stanley strategists said.
The bitcoin (BTC-USD) bear market that started more than a year ago has been the result of mostly institutions selling, Shah and Steimetz said. They expect that retail investors may start to sell if BTC trades below $10K.
Morgan Stanley analysts assessed the impact on some related stocks that they cover:
- Analyst Mike Cyprys wrote that FTX’s troubles could bode well for established incumbent exchanges like Nasdaq (NASDAQ:NDAQ) and CBOE Global (BATS:CBOE) that are “entering the digital asset ecosystem and bring with them decades of experience in operating market places and risk management.”
- Robinhood Markets (NASDAQ:HOOD) is likely to see increased trading via its app in the near-term as the crypto volatility boosts volume. “But once volatility subsides, we can see a more challenging market backdrop that weighs on HOOD’s crypto transaction revenues,” Cyprys said.
- For Silvergate Capital (NYSE:SI), analyst Manan Gosalia sees direct and indirect outflows as the primary concern, “which would impact both margins and net interest income, as Silvergate’s main source of revenue is the spread income on deposits held by their customers.” Digital asset exchanges account for ~64% of SI’s total deposits as of Q3 2022, he said. And according to the company’s latest 10-K, its 10 biggest depositors accounted for ~45% of total deposits. Gosalia said it’s likely that FTX is included in that share.
- Analyst Mia Nagasaka expects that FTX has little direct impact on Monex Group (OTCPK:MNXBF) fundamentals. However, “the key point for Monex is that if global major such as Binance expand their presence in Japan, we see risks of fee compression outside of the U.S., we we would like to monitor developments closely.”
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