The ripple effect: How FTX’s collapse shook the crypto world

By Arnold Mutunga 

The collapse of FTX, a top crypto exchange, in early November 2022 left a permanent scar on the crypto industry. Investors, traders, and affiliated institutions bore the brunt of the scandal, losing over $10 billion in the FTX saga. The crypto industry has yet to recover as the market still grapples with the effects a year down the line. 

During these past few months, a clearer picture of the events leading to the collapse of the exchange has been revealed. The ongoing court cases against the disgraced FTX CEO, Sam Bankman-Fried (SBF), provide deeper insights about the extent of the damage that will be useful in charting a path forward for crypto regulation. 

A closer look into the immediate aftermath reveals that the effects of the FTX implosion will continue to affect the crypto market well into the future. However, if history is to repeat itself, the sector will emerge stronger than before. 

Aftermath and call for stricter regulation 

The FTX collapse had a domino effect on the broader crypto market with closely affiliated institutions falling in quick succession. Previously reputable firms like BlockFi, Genesis Trading, Galaxy Digital, and Voyager Digital among others got swept in the contagion that followed.  

Over 130 FTX-affiliated entities and imperiled companies filed for bankruptcy. Numerous other players with exposure to FTX were also severely impacted prompting them to restrict or disable withdrawals altogether. This prompted the Securities and Exchange Commission (SEC) to announce increased scrutiny for crypto exchanges. 

The FTX contagion occurred during a pivotal moment in the development of cryptocurrency regulations, leading to calls for stricter regulation and acceleration of the process. Subsequently, the European Union brought forward its plans to put into effect the Markets in Crypto Assets regulation by 2024. Similarly, the United States is currently in the process of advancing the Digital Commodities Consumer Protection Act to shield investors and traders from nefarious actors. 

Interestingly, insiders anticipate that the new regulations will carry more stringent restrictions on the kinds of entities authorized to provide cryptocurrency services. This will enhance the levels of oversight in the industry and bring a degree of normalcy to a chaotic market that has evidently failed to self-regulate. 

Wavering investor confidence 

The FTX collapse caused a considerable increase in uncertainty within the crypto market with traders and investors wary about the stability of similar institutions. This was followed by massive withdrawals from crypto exchanges that adversely affected confidence in the market. 

Activity on exchanges fell by about 25% within a week of the incident with low trading volumes indicating a market pullback as skepticism eroded confidence. There were sharp declines of over 20% for major cryptocurrencies like Bitcoin and Ethereum within a few days. Some altcoins lost over 50% and still haven’t recovered. 

The total crypto market capitalization drastically fell from over $2.5 trillion to below $2 trillion in less than a week, an indication of the sector’s susceptibility to both internal and external shocks. To date, the larger crypto market is yet to recover its pre-FTX levels as the capitalization has stabilized slightly above $1 trillion.  

Market resilience, reform & evolution 

The FTX collapse joins a long list of incidents that have rocked the crypto industry before, only for the market to come back stronger. However, this incident was significantly bigger considering the amounts lost and subsequent shockwaves sent through the sector. The resulting volatility, uncertainty, and negative sentiment reveal that the market is still vulnerable to such shocks. 

After the dust settled, the market slowly picked itself up with the leading coins like Bitcoin and Ethereum weathering the storms to rise back up over 40% and 20%, respectively, from their post-FTX collapse lows. This is a testament to the growing market resilience as the industry becomes more robust. 

Interestingly, opinion among crypto insiders has gradually shifted. The industry used to be categorically against government intervention. After the FTX disaster, however, there have been calls for reform with the introduction and enforcement of regulation being quite popular. This congruence in opinions is an ideal breeding ground for reforms in the crypto sector, one that is needed to propel the industry to the mainstream market. 

Additionally, safety and risk management education are on the rise since the incident. This education is aimed at promoting self-custody and minimizing risk to third party custodial services.  

Conclusion 

The FTX collapse once more exposed the crypto market’s vulnerabilities that triggered much uncertainty and changes. The incident underscores the need to accelerate the formulation and enforcement of regulation to drive change in the industry. Additionally, it showed there is a need for increased transparency, robust risk management, and reforms to boost market confidence. 

However, it’s not all doom and gloom. The incident also serves as a teachable moment and an opportunity for growth by learning from past mistakes and improving on the industry’s shortcomings. FTX collapse provides the key industry players a platform to build more secure, stable and reliable structures for a resilient future of the crypto market.Subscribe to get early access to podcasts, events, and more!