Contagion fears are sweeping across the crypto industry as market participants race to determine who is exposed to Sam Bankman-Fried’s secretive digital asset trading company Alameda Research.
Alameda, a proprietary trader, has been a low-profile part of the entrepreneur’s crypto empire, but is at the centre of the storm that has engulfed his crypto exchange FTX.
Market worries over Alameda’s financial health accelerated, triggering a wave of withdrawals from customers at FTX, and pushing Bankman-Fried to seek a rescue from larger rival Binance.
As the impact of shock deal set in, traders worried that the collapse of Alameda, one of the biggest traders on FTX, could resound through the markets at rapid speed.
“[Alameda] will be scrambling to liquidate assets on their books to meet any debt obligations, of which there are many. In addition to the loans owed to FTX, Alameda is also an active participant in decentralised finance,” said Sean Farrell, head of digital asset strategy at Fundstrat, a markets research provider. “There is sufficient reason to believe the risk of further contagion remains.”
Binance has declined to say whether its takeover plans for FTX include the trading firm. A bailout could help to insulate the digital asset industry and the exchange’s customers from further fallout, but would add to the risks of the transaction.
Crypto traders have widely assumed that Binance will leave Alameda to fend for itself, and that the unwinding of its positions will inflict further pain on the digital asset market already reeling from the near collapse of FTX and a two-thirds fall in asset values this year.
“Crypto players are reacting quicker to news and rumour, which in turn builds up a liquidity crisis much faster than one would have seen in traditional finance,” said Fabian Astic, head of decentralised finance and digital Assets, at Moody’s, the rating agency.
Bitcoin, the largest cryptocurrency, dropped 5.4 per cent to $17,700, near its lowest level in two years on Wednesday, while ethereum fell 9.2 per cent. Overnight shares in Coinbase, the crypto exchange, fell 10.8 per cent.
Galaxy Digital, US billionaire Mike Novogratz’s crypto financial group, said on Wednesday it had exposure of nearly $77mn in cash and digital assets to FTX, of which $47.5mn was being withdrawn.
Others have rushed to reassure the market that they are not exposed to the exchange or FTT, the in-house currency for trading on FTX. Brian Armstrong, chief executive of Coinbase, said his company didn’t “have any material exposure to FTX or FTT (and no exposure to Alameda).”
Most at risk will be companies that lent assets to Alameda and crypto projects in which the trading firm heavily invested, stakes it may now be forced to sell in order to balance its books.
The firm was a major backer of Solana, a rival blockchain to Bitcoin, which lost as much as 50 per cent of its value against the dollar overnight on Wednesday, before paring losses in volatile trade.
“I don’t see a situation where [Alameda] comes back from this . . . I think they were staking a lot on the value of that FTT token,” said one person familiar with the matter. “Alameda should have been able to fix this if they actually had what they said they had, and this is a clear signal they don’t.”
Jon de Wet, chief investment officer at crypto wealth manager Zerocap, which has traded with Alameda in the past, said Alameda was until recently seen as a solid counterparty for lenders and hedge funds across the crypto sector.
“Alameda was a respected firm,” he said. “I think there will be a lot of firms that would have had exposure to Alameda.”
The trading firm was founded in 2017 by Bankman-Fried to pursue arbitrage opportunities across different countries and exchanges in the nascent crypto asset market, and has since expanded its activities.
“Alameda came before FTX. It would take its balance sheet and it would provide liquidity on exchanges and earn a spread. It would also take directional bets as prop trade,” said de Wet.
The scale of the pain will depend on whether Binance also backstops Alameda. Late on Tuesday an FTX spokesperson told the Financial Times that “Alameda is included in the deal”.
Binance declined repeated requests to clarify its position. Its silence will probably reinforce the views of those in the market who assume the trading firm will be allowed to fail.
“Alameda is dead in the water,” said a crypto hedge fund investor. “The focus should be on Alameda’s investments.”
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