Could FTX’s Bankruptcy Trigger a Domino Effect?

On Nov. 11, FTX filed for Chapter 11 bankruptcy protection in the United States. 

The court filings list over 130 entities, including FTX International, Alameda Research, the trading arm of Sam Bankman-Fried’s group of crypto companies, and FTX US, which was supposedly not in danger according to SBF. As per the bankruptcy filings, FTX US and Alameda Research had between $10 billion and $50 billion in liabilities and the same range in assets. 

After the announcement, contagion fears flooded the crypto industry. “With FTX going down, we will see cascading effects (…) Especially for those close to the FTX ecosystem, they will be negatively affected.” Changpeng Zhao said at a conference in Indonesia.

Paradigm, one of the largest investment firms in the industry, said it wrote off its investment in FTX. Crypto hedge fund Galois Capital’s cofounder Kevin Zhou, said that half of its funds are trapped on FTX, according to The Financial Times, which estimates that the value of the funds is approximately $100 million. Moreover, crypto trading firm Genesis, after revealing that it had $175 million in assets stuck in FTX, had to receive $140 million in funds from its parent company Digital Currency Group (DCG) to bolster its balance sheet.

Additionally, bankrupt crypto lender Voyager had to reopen the bidding process for its assets. FTX had won the bid for Voyager’s assets in September, agreeing to pay $1.4 billion. 

The markets have taken a hit as well. The price of BTC and ETH fell 22% over the last 7 days. The token of Solana, a blockchain in which Bankman-Fried’s group had some heavy investments, is down 60% in the same period, going from a market capitalization of $12 billion to $4.8 billion. 

The impact of FTX’s collapse is already severe, but there are many who think that this is only starting. Given that FTX Ventures and Alameda had invested in 255 crypto startups, the contagion effects could be massive. People are comparing this fallout to the 2008 financial crisis, with the difference that this time there’s no government to bail the big players out.