Following the spectacular collapse of FTX into bankruptcy last week, investors have been rushing to withdraw funds from rival exchanges. Contagion fears have focused on Crypto.com, a Singapore-based exchange. But the reaction of bitcoin, the flagship crypto, has been oddly muted.
Chief executive Kris Marszalek said he would publish proof of Crypto.com’s reserves “within weeks”. This seemed a tardy way for a data-driven business to forestall an incipient run by investors. The statements of crypto entrepreneurs now need verification by boring, old-fashioned auditors, it seems.
FTX appears to have net liabilities of some $8bn. Classic smashes of financial companies have often featured steep asset mark-ups that come unstuck. Authorities in the Bahamas, FTX’s base, are investigating whether criminal wrongdoing occurred.
It is reasonable to surmise that counterparty exposure will be concentrated most toxically among crypto businesses. Their main assets are digital assets, which they would scramble to dump in any dash for real cash.
However, prices have moved little, given historic volatility. Bitcoin has fallen 20 per cent since the start of November. But daily movements of equivalent scale have disappeared. This is odd at a time when volatility of the US stocks that bitcoin previously mirrored has been rising.
Using trailing volatility measures Bitcoin even fell below S&P 500 volatility at the end of October, the first time since March 2020. Bitcoin’s calm and an unusually long period of rangebound trading around the $20,000 level belied higher trading volumes.
Bitcoin can hardly have become less risky. Chartists would insist it is defaulting to “resistance levels”. Or some other mystery factor is supporting its price.
Crypto enthusiasts, for all their past vocal support for bitcoin, are, however, declining to invest in the digital currency at a big discount to historic prices. As for conventional investors, their valuation is implied by the 41 per cent discount at which shares in Grayscale’s bitcoin investment trust trade relative to net asset value.
That points to widespread and entirely rational fears that contagion is spreading across the crypto industry.