A “new wave of crypto deleveraging” is likely under way, with bitcoin itself poised to drop another 25% amid a “cascade” of margin calls.
That was the grim assessment JPMorgan gave clients on Wednesday as the world’s third largest crypto exchange, FTX, teetered on the edge of bankruptcy after a possible rescue from fellow exchange Binance dissipated. The fresh cryptocurrency drama that has unfolded over the last few days has sparked sharp losses across the sector.
“What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem,” said a team of strategists led by JPM’s Nikolaos Panigirtzoglou.
The crisis began after Binance CEO Changpeng Zhao made public the exchange’s decision to liquidate its remaining position in the native FTX Token, FTT. Alameda Research is the trading company of FTX owner Sam Bankman-Fried.
“Given the size and interlinkages of both FTX and Alameda Research with other entities of the crypto ecosystem including DeFi platforms it looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting similar to what we saw last May/June following the collapse of Terra,” he said.
Venture-capital firm Sequoia Capital said early Thursday that it had written down its FTX stake to $0 in anticipation of the exchange possibly filing for bankruptcy protection.
The reported $8 billion liabilities of Alameda is “big enough to create a similar wave of deleveraging to that seen following the $20 billion Terra USD collapse last May. And similar to what we saw after the collapse of Terra USD, this deleveraging is likely to last for at least a few weeks unless a rescue for Alameda Research and FTX is agreed quickly,” said JPM analysts.
Read: Crypto investors rattled as Binance abandons its proposed acquisition of rival FTX
On the positive side, while deleveraging could take several weeks, the hit to crypto market capitalization is expected to be smaller in the wake of the Terra collapse given advanced deleveraging ahead of the Alameda/FTX saga, said JPM.
which has lost around 19% over the past seven days, is headed for more losses, warned the analysts.
“One way of thinking about the downside over the coming weeks is the bitcoin production cost which historically acted as a floor for the bitcoin 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,” said Panigirtzoglou, who provided the following chart:
That 25% downside would bring the crypto market cap to a low of $650 billion, said strategists.
Bitcoin selling had cooled Thursday as the broader market bounced after softer-than-expected inflation. The No. 1 cryptocurrency was trading around $17,282 after falling to a November 2020 low of $15,554 on Wednesday. The crypto is down 65% year to date.
JPMorgan said the Alameda/FTX saga will no doubt “increase investor and regulatory pressure” on crypto companies and entities to disclose more balance sheet information, to keep client assets safe and limit asset concentration. More diligent management of counterparty risk among crypto market participants is also likely.