Looking Back on FTX’s Impact

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The ongoing impact of the FTX collapse.

On October 3rd, one of the most consequential trials in financial history is set to begin. Sam Bankman-Fried will face seven related to the management and dramatic collapse of FTX, once one of the largest cryptocurrency exchanges in the world. Since November 2022, Kaiko has extensively covered this collapse and ongoing market impact, and today we want to look back on the exchange’s impact.

Back in 2021, FTX emerged as a market leader seemingly out of nowhere due to some strategic business decisions:

1. Very low fees and high liquidity – FTX had some of the narrowest spreads and deepest books in crypto, attracting institutional traders.

2. Expansive product offering – FTX offered highly leveraged products and hundreds of crypto assets favored by risk-taking retail traders.

3. Marketing and Expansion – The exchange spent enormously on marketing initiatives, acquisitions, and industry bailouts.

(Check out our deep dive on ‘The Rise of FTX‘ , written last summer)

At its peak, FTX was processing nearly $100bn in trade volume every month, on par with global behemoths like Coinbase.

FTX was certainly a big exchange with massive name-brand recognition, but what is interesting is that the exchange never captured more than single digits of market share. In fact, FTX’s market share of spot volume only ever peaked at ~7%, magnitudes less than Binance, and a bit less than OKX and Coinbase.

FTX’s bread and butter was derivatives. The exchange offered numerous highly-leveraged and innovative contracts that attracted a certain risk-taking type of trader. They fared much better when it came to derivatives market share, peaking at ~15%.

While FTX never grew to be as big as Binance, the exchange’s collapse rippled throughout the industry. Many market makers and traders had stored significant funds on the exchange, partnered with devastated crypto projects in its portfolio, or had accepted FTT, the exchange’s concocted cryptocurrency, as collateral.

In fact, FTX’s FTT token was the trigger for the collapse, as we covered extensively at the time. It turns out Alameda Research, the unprofitable trading firm affiliated with the exchange, held a significant portion of its balance sheet in the token, which was created out of thin air by the exchange — hence the nickname “magic beans.”

Once FTT started plummeting, the exchange quickly unraveled with a multi-billion dollar hole in its balance sheet. The industry is still reeling from the impact of this collapse.

A week after the collapse, we noticed that global crypto liquidity had halved, and thus was born the phrase “The Alameda Gap.” The Alameda Gap refers to the drop in liquidity on global exchanges in the aftermath of the collapse, largely due to the huge losses incurred by market makers. That gap has not yet recovered, and market depth is still just half of what it was pre-collapse.

Over the past 11 months, crypto trade volume and market depth has hit multi-year lows along with price volatility. It has certainly been tough times for the industry, but the worst may thankfully be behind us and we hope this trial can provide much-needed closure.

Data Points

What’s causing high tether borrow rates on AAVE?

USDT borrow rates surged over the weekend as a wallet withdrew more than $50mn USDT deposited on the Aave V2 protocol. Users were quick to react to the surging rates, repaying more than $30mn USDT in a matter of hours. Others sought to benefit from the higher rates by depositing USDT, with about $35mn deposited in the same timeframe.

Both of these actions helped to quickly decrease borrow rates, though they remain just under 40% as of this writing. The wallet that withdrew the USDT has sent the funds to a new wallet that has not yet utilized the tokens. Currently, about $270mn USDT is deposited in Aave V2, just over 80% of which is being borrowed.

Bitcoin closes september in the green.

September is historically a bad month for both traditional equities and crypto assets, with BTC registering negative returns 8 out of the past 12 years. However, despite lacklustre trade volume and surging risk-free rates, BTC registered one of its best September monthly performances closing last month up 4.7%.

However, looking at the quarterly performance by crypto sector, both BTC and ETH lost traction relative to the previous quarter as the ETF-related led rally faded away and volatility plummeted to a multi-year low. This was partly driven by seasonal factors as Q3 is historically the lowest volume quarter for BTC.

DeFi tokens were the only sector closing the quarter in positive territory, led by Compound’s COMP and MakerDAO’s MKR. Investor sentiment around these protocols was boosted by their increasing reliance on U.S. Treasuries for generating income coupled with the US Fed’s commitment to keep rates higher for longer.

MKR surges on RWA narrative.

MakerDAO’s token MKR has rallied by 32% last month on hopes that higher for longer U.S. Treasury yields will boost the protocol’s revenue. MakerDAO has been striving to diversify the assets backing its $5.5bn USD-pegged stablecoin DAI since the end of 2022. The shift away from stablecoins and towards Real World Assets (RWA) accelerated after the U.S. banking crisis in March. Back then USDC — then DAI’s primary reserve asset — temporarily lost its peg in the wake of the collapse of Sillicon Valley Bank.  As a result, DAI also de-pegged while MKR lost more than 20% of its value within just a few days.

The share of USDC in DAI’s collateral has dwindled from over 50% earlier this year to just 8%, while Real World Assets have emerged as a significant collateral source. The recent price rally of MKR, coupled with a surge in spot trade volume, suggests growing confidence in the token. However, the derivative markets have been sending somewhat bearish signals, as funding rates remained neutral to slightly negative. The trend of transitioning to traditional assets is gaining traction with Frax Finance founder also proposing an expansion into RWA last month.

HTX (ex. Huobi) volume remains elevated amidst hack.

Crypto exchange HTX – formerly Huobi – had 5,000 ETH ($8mn) stolen from one of its hot wallets last week. HTX advisor Justin Sun said that the exchange would offer $400k as a bounty if the funds were returned within a week. The relatively small hack had little effect on HTX’s soaring volumes, which remained elevated throughout the saga.

Interestingly, lower volume tokens’ (less than $1bn volume from May to October) daily volume surged from $200mn in early July to over $800mn in late July as volumes slumped elsewhere throughout the market. These smaller tokens have continued to register high volumes even as the market slogged through August and September, two of the lowest volume months since 2020. We have previously observed likely wash trading on HTX.

Kraken becomes the largest GBP market.

Kraken  has emerged as the largest GBP  market over the past few months after Binance suspended its GBP deposit and withdrawal services for UK customers  in May and officially exited the UK in June. Its market share of GBP trade volume neared 50% as of last week, up from just 20% in the beginning of the year.  Coinbase was the second largest GBP market with 30% while Binance has seen its market share shrink to just 7% from as high as 51% in early January.

The UK financial regulator (FCA) has introduced tougher marketing regulations and additional requirements around new customers. This has pushed crypto exchange Bybit and payments giant PayPal to suspend offering crypto services to UK customers.

Fiat on and off ramp hurdles have led to falling liquidity and price discrepancies. The monthly GBP trade volume on Binance is down by 94% and BTC-GBP and ETH-GBP have been trading at a premium of 2% to 6% since August suggesting users are rotating into crypto assets.

U. S. Inflation shows more signs of cooling.

The Fed’s preferred inflation gauge the Personal Consumption Expenditure (PCE) slowed to 0.1% month-over-month in August, beating markets’ expectations. This brings the annualized PCE inflation below the Fed’s 2% target for the first time since the pandemic. The data point adds to rising hopes that the US central bank won’t hike rates at its November meeting. However, the release also showed that US households still have significant residual savings. Despite headwinds such as the resumption of student loans repayments this month and soaring gas prices, this suggests that US consumption could remain more resilient than previously thought.