According to analysts at JP Morgan, the unraveling of the FTX crypto exchange has driven investors to withdraw their funds from their accounts on some prominent exchanges in the market.
On Wednesday, the investment bank’s analysts informed investors in a note that there had been outflows on all prominent crypto exchanges in the previous week.
However, they added that the most ‘severe’ withdrawals had occurred on crypto exchanges like crypto.com, OKX and Gemini.
The analysts also asserted that the stablecoin market was coming down and this would hurt the price of other cryptocurrencies as well, including bitcoin.
The FTX fiasco
Considered one of the leading crypto exchanges in the market, FTX imploded in the previous week, resulting in losses for investors worth billions of dollars.
As it turns out, the funds were being used by FTX for making bets via Alameda Research, a trading desk that had also been founded by FTX’s founder Sam Bankman-Fried.
A leaked document revealed that Alameda’s Research was made up of illiquid assets, including a significant number of FTT tokens issued by FTX.
This prompted rival exchange Binance to announce that it was selling its FTT holdings, which pushed other users to do the same, resulting in a liquidity crisis for FTX that ended in bankruptcy.
The fallout
The crypto market was shaken due to the exchange’s downfall, as prices of a number of cryptocurrencies and tokens plunged.
The fallout saw Bitcoin, the world’s largest crypto in terms of market cap, drop to a low of two years. The JP Morgan analysts said that a similar trend had emerged when the Terra ecosystem had collapsed in May.
It is likely that this deleveraging phase will continue for at least a couple of weeks and would result in numerous margin calls and failures of various platforms and companies in the crypto industry.
In this case, deleveraging is a situation in which companies, or investors, cut back on the debt they have taken on for making crypto investments.
Market analysts believe that the crypto market will hit rock bottom once the bad debt is flushed out and then begin its recovery.
Stablecoins
The analysts also said that it will be difficult for the crypto market to recover if stablecoins do not stop declining.
Crypto prices will not be able to see a sustainable recovery unless the stablecoin market stops shrinking. They are also a type of cryptocurrency but are actually pegged to another asset, like gold or US dollars.
As opposed to bitcoin and other cryptocurrencies, stablecoins are not as volatile and can offer more stability.
Crypto traders often use stablecoins because they do not have to convert their digital assets into fiat currency like USD for entering and exiting positions.
Therefore, they are often considered the crypto market’s backbone. According to JP Morgan, the market cap of the biggest stablecoins has been declining since the collapse of the Terra ecosystem in May.
It had reached its peak of $186 billion, but it has fallen by almost $25 billion since then.