HONG KONG/SINGAPORE: Cryptocurrency markets nursed heavy losses on Thursday (Nov 10), with bitcoin hovering near a two-year low as investors fretted about the fallout from the implosion of crypto exchange FTX, which was seeking new funds to plug a gaping hole in its finances.
Larger rival Binance walked away from a bailout of FTX on Wednesday, sending cryptocurrency prices plunging as hopes for a rescue diminished.
On Thursday, FTX head Sam Bankman-Fried told staff in a Slack message seen by Reuters that "for the next week, we will be conducting a raise".
A message on the FTX website said that it was no longer processing withdrawals or onboarding new users. TX's shortfall comes after users rushed to withdraw US$6 billion in crypto tokens from FTX in just 72 hours.
Focus among investors is on the unknown size of customer losses and the hit to sentiment from the latest and possibly largest collapse in an industry that has turned into a minefield for investors.
FTX's native token, FTT is down 90 per cent this week and was attempting to steady around US$2.90 - not far above its record low around US$1.50. Bitcoin fell below US$16,000 for the first time since late 2020 overnight and at 12.10am GMT was trading at US$16,310, showing little sign of recovery.
The seeds of FTX's downfall were sown months earlier, in mistakes Bankman-Fried made after he stepped in to save other crypto firms, according to interviews with several people close to Bankman-Fried and communications from both FTX and Binance.
In Thursday's Slack message, Bankman-Fried said "as one part of the potential above raise, we have had talks with Justin Sun".
Justin Sun, founder of cryptocurrency network Tron, said in a tweet on Thursday "we are putting together a solution together with #FTX to initiate a pathway forward", without giving further details. Sun did not respond to a request for comment.
Another exchange, OKX, said it had been approached earlier in the week by Bankman-Fried, who described liabilities of US$7 billion that needed covering fast.
"Even Elon Musk would not be able to commit to a deal with US$7 billion liability within a few hours of negotiations. That was too much for us," Lennix Lai, director of financial markets at OKX told Reuters.
"(It) is a big hole to plug," he added. "The dagger will continue to hang over the crypto market, as long as the outlook of FTX's fate remains unclear."
Bloomberg reported that Bankman-Fried had told investors that FTX faced a shortfall of up to US$8 billion and that the company would need to file for bankruptcy unless it received further funding.
Investors were watching for any signs of contagion spreading beyond the crypto sector. Fadi Massih, vice president at Moody's Investors Service, said the losses have "largely remained contained within the crypto sphere".
"However, should leverage again build substantially in the crypto finance system, it could unsettle the banking system, even if banks continue distancing themselves from direct interaction with the crypto economy," Massih said in emailed comments.
"A top exchange failing - that's on a different level," said Danny Chong, CEO of decentralised finance firm Tranchess, with potentially wider ramifications than the failure of stablecoin TerraUSD and crypto hedge fund Three Arrows Capital this year.
"People's funds, including market makers', are still currently with FTX," he said. "Just when people were thinking that crypto winter might probably not last ... along comes another episode like this."
The US securities regulator is investigating FTX.com's handling of customer funds and crypto-lending activities, according to a source with knowledge of the inquiry.
Bloomberg reported that the US Department of Justice is also looking into the turmoil. A DOJ spokesperson declined to comment.
Investors are already writing off funds ploughed into FTX. Venture capital fund Sequoia Capital wrote down a US$150 million exposure to zero on Wednesday. Canada's Ontario Teachers Pension Plan, Tiger Global and Japan's Softbank are also FTX investors.
Broker Robinhood said it has no direct exposure to FTX, but Bankman-Fried holds a stake in the firm and its shares fell heavily on Tuesday and Wednesday.
Most crypto players remain bullish about the long term, but are braced for further falls in the near future. Bitcoin's 20 per centlosses this week are comparable to the drop in June when Three Arrows Capital came under stress.
"What makes this new phase ... problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking," analysts at J.P. Morgan said in a note to clients.
"Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis."