Crypto Exchanges Not Immune to Bitcoin Freefall

As bitcoin trades below $16,000 and through another key psychological barrier, investors and observers can only wonder, What’s next?

While round numbers tend to serve as shorthand for traders’ and investors’ confidence — or lack of it — the FTX meltdown is proving to be a recurring nightmare that is calling into question any number of crypto business models.

What is known for sure is that the sector’s biggest and most watched barometer — bitcoin — is down 75% from its all-time high of $68,000 one year ago, and the knock-on effects of that retreat alone imperil the virtual exchanges that make the functioning of the crypto ecosystem possible at all.

There have been any number of companies that — as they offer up the technology, the platforms and the exchanges that underpin crypto — ostensibly should be immune to crypto’s price drops.

Exchanges, after all, act as “arms merchants” that should see top-line torque no matter whether optimism or pessimism reigns. What matter is that trading volumes remain lofty. In recent days, many of these exchanges have come out with statements and management commentary that they have minimal or no exposure to FTX.

Exchanges in the Crosshairs 

Coinbase is but another visible examples. As noted in this space, firms including Binance, Crypto.com, OKX and Derebit made moves to provide evidence that they have enough reserves to match customers’ liabilities.

But trading is what we’d term the “oxygen” of the exchanges — and headwinds are looming for this critical activity. As noted in publications including Barron’s and CNBC , Wall Street analysts at Mizuho Bank state that industrywide trading volumes are 30% to 40% below the average for the year. The general downtrend is visible in this chart from the site Bitcoinity.com. Outflows of crypto also wind up pinching exchanges’ activities — there were reports earlier this month that another exchange, Gemini, saw $485 million in net outflows in a 24-hour span. Stablecoins offer no respite, either, as there have been numerous examples of these “pegged” offerings breaking through their pegs.

Amid this post-FTX knock-on effect sell-off, it is hard not to wonder who the next victim of this vicious cycle might be, especially as investors pull their holdings from centralized exchanges and liquidity dries up. As liquidity dries up, the price volatility becomes more extreme. As that happens, the various holdings on exchanges (and other firms’ balance sheets) become worth less … which fosters a liquidity crunch in those business models. Eventually the HODLers — those who “hold on for dear life” — get shaken out. Simply holding onto bitcoin and its brethren is no guarantee that the bloodletting lets up. 

Rinse. Lather. Repeat. Confidence is what keeps people trading, lack of confidence forces a reckoning of digital currencies across all areas of the ecosystem, and many users may leave the market entirely. The negative sentiment is reflected in plummeting stock prices of the arms merchants — Coinbase’s stock is now trading at a bit more than $40, down 10% on the day and about 44% from recent highs (and the bonds trade at a discount). FTX’s contagion, then, spreads far and wide, and as the old soul song says — nowhere to run, nowhere to hide.

For all PYMNTS cryptocurrency coverage, subscribe to the daily Crypto Newsletter.