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Crypto: Investors fear potential FTX bankruptcy spilling over to reeling crypto, stock markets


Investors are concerned that a potential bankruptcy of FTX, once the world’s third largest digital asset exchange by trading volume, will spill over to the already battered crypto and stock markets.  

Major cryptocurrencies and stock indexes plunged Wednesday as Binance, the world’s largest crypto exchange, said it would abandon a proposed deal to buy FTX, citing its due diligence of the platform, news reports of mishandled customer funds and other factors.

Read: Crypto investors rattled as Binance abandons its proposed acquisition of rival FTX

FTX faces a shortfall of up to $8 billion due to withdrawal requests in recent days, the Wall Street reported, citing people familiar with the matter. Sam Bankman-Fried, chief executive at FTX, told investors that the company will need to file for bankruptcy without a cash injection, Bloomberg reported


on Wednesday plunged more than 15% to as low as $15,554, the lowest level since November 2020, according to CoinDesk data. The largest cryptocurrency is down more than 60% year-to-date. Ether

plummeted 19% Wednesday to around $1,085. 

FTX could be the latest company to collapse in the crypto industry, which also saw the shakeout of several other major players this year, including blockchain Terra, crypto lender Celsius and hedge fund Three Arrows. FTX acted as a white knight for multiple embattled digital asset companies earlier this year, including Voyager and BlockFi. The insolvency crisis of FTX might hurt investor sentiment even further, analysts said.

“Events like this create short-term forced selling that drives down the market,” noted Matthew Hougan, chief investment officer at Bitwise Asset Management. “For a period of time after this, which could be months, investors will be hesitant to come back into the market for fear that there’s another shoe to drop,” Hougan said. 

It also could further spillover into the stock market, according to Pranav Kanade, portfolio manager at VanEck.

“There are people who have their deposits stuck on and they can’t get their money out and also crypto prices are largely corrected, so that affects investor psychology and investor risk appetite,” Kanade said. 

All three major stock indexes ended in the red Wednesday, with the Dow Jones Industrial Average

down 646 points, or almost 2% to around 32,513. The S&P 500

fell 2.1% and the Nasdaq Composite

finished 2.5% lower Wednesday. 

“I’d argue that most of today’s equity declines are related to crypto markets, not the midterm elections,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

Although, he also estimated that traditional finance has a roughly 3% to 6% exposure to crypto, albeit hedge funds likely have a lot more.

“The problem is, it’s all based on estimates,” Frederick said, by phone, noting that most crypto companies aren’t very transparent, don’t need to file financial reports and lack robust regulatory scrutiny.

“A lot of what we know is what they have to offer,” he said.

Read: ‘Is there anything about crypto that is as it seems?’ FTX failure threatens industry’s reputation in D.C.

Still, the U.S. stock market is valued at over $46 trillion, while the crypto market capitalization stands at around $800 billion on Wednesday. It is unlikely that the FTX crisis could have a long-lasting impact on stock markets, according to Mark Connors, head of research at 3iQ.

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