(Kitco News) The chaos in the crypto space in the aftermath of the FTX drama has led some analysts to issue warnings of a broader contagion risk that could impact most markets already under pressure.
“The breakdown of bitcoin and crypto assets could trigger capitalization to resolve stops in most markets that have been under pressure this year,” Bloomberg Intelligence senior commodity strategist Mike McGlone said Wednesday. The big risk-asset reversal of 2022 became clear as of November 9, but it’s the remaining trading sessions that could set the stage for 2023.
It all started out of nowhere when the world’s biggest bitcoin exchange Binance signed a non-binding agreement to buy FTX’s non-U.S. it. Unit to help cover a “liquidity crunch.” This came after Binance Chief Executive Officer Changpeng “CZ” Zhao said he had unloaded a $530 million holding of FTX’s native token. The two leaders are known to be high-profile rivals in the cryptocurrency market.
To read more about what just happened with FTX, its liquidity problems and Binance, click here.
The new strains in the digital asset industry sent the crypto market to a two-year low on Wednesday.
Bitcoin tumbled to November 2020 lows, down nearly 16% on the day, and last traded at $17,029.47. Ethereum dropped to July lows, down 24.5% on the day, and last traded at $1,165.42.
The overall crypto market cap fell to $886 billion, dropping 12.5% on the day, with most cryptocurrencies seeing red.
One of the main reasons why the FTX problems are causing such tribulations in the crypto space is because its co-founder Sam Bankman-Fried played a massive role as a liquidity provider of last resort during the summer’s meltdown.
According to McGlone, Bitcoin may be the leading indicator in how all this plays out, noted McGlone. There is an increasing risk that the world’s largest cryptocurrency could test support at around $10,000, he added.
“The loss of confidence from FTX’s fall and its leader, Sam Bankman-Freed, is a blow to crypto, but the macroeconomic dominoes may be more significant,” McGlone warned. “The Nasdaq-100 index is showing comfort below its 200-week moving average with good reason to continue lower amid the strengthening of the US economy.
The issue this time is all about liquidations and mass panic that could trigger a series of bankruptcies, noted GlobalBlock analyst Marcus Sotiriou.
“In disasters like we saw yesterday, the market needs someone to bail out the bankrupt entity in order to save customer money,” Sotirio said Wednesday. “However, when there is no one left to bail out the company, that’s when contagion can spread to other companies – in this particular situation, we don’t know yet if Binance can/will go through with the deal.”
Binance is also dealing with its own problems, including the investigation by the US.
“Many of the problems of traditional finance that cryptocurrencies aim to solve are replicated in the crypto market, because many centralized entities have become too greedy,” Sotiriou added.
The overall macro landscape remains positive for assets like Bitcoin, gold and US. it. Treasury bonds, McGlone pointed out. And this is all because of a potential slowdown in inflation and the tightening of the Federal Reserve.
“The most extreme discount in Bitcoin history to its 30-month moving average comes with a similar drop in global money supply, which should have implications for the crypto’s recovery,” McGlone wrote. “The largest number of central banks in history raising rates, and liquidity declining faster than in 2009 and 2015, could signal a drop in inflation as fast as it is up, providing support for gold, US Treasury bonds, and Bitcoin. The volatile asset may be in the early days of shifting to trade more like bonds and gold.”
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