The fear of contagion sweeps across the crypto industry as market participants race to determine who is exposed to the secretive digital asset trading company Sam Bankman-Fried’s Alameda Research.
Alameda, a proprietary trader, has become a low-profile part of the entrepreneur’s crypto empire, but is at the center of the storm that engulfed his crypto exchange FTX.
Market worries about Alameda’s financial health accelerated, prompting a wave of withdrawals from customers at FTX, and prompting Bankman-Fried to seek rescue from its big rival Binance.
As the impact of amazing deal set in, traders worried that the collapse of Alameda, one of the biggest traders in FTX, could resound through the market at a fast speed.
“[Alameda] will be scrambling to liquidate assets on their books to meet all debt obligations, which are many. In addition to lending debt to FTX, Alameda is also an active participant in decentralized finance,” said Sean Farrell, head of digital asset strategy at Fundstrat, a market 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 trading companies. A bailout can help to insulate the digital asset industry and exchange’s customers from further fallout but will add to the risk of the transaction.
Crypto traders widely assume that Binance will leave Alameda to fend for itself, and that unwinding its position will cause further pain in the digital asset market that is already reeling from the collapse of FTX and a two-thirds drop in asset values this year. .
“Crypto players react faster to news and rumors, which in turn creates a liquidity crisis faster than would be seen in traditional finance,” said Fabian Astic, head of decentralized finance and digital assets at Moody’s, a rating agency.
Bitcoin, the largest cryptocurrency, on Wednesday fell 5.4 percent to $17,700, near its lowest level in two years, while ethereum fell 9.2 percent. Overnight shares in Coinbase, a crypto exchange, fell 10.8 percent.
Galaxy Digital, the financial group of US crypto billionaire Mike Novogratz, said on Wednesday that it had exposure of almost $77m in cash and digital assets to FTX, of which $47.5m was withdrawn.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 does not “have any material exposure to FTX or FTT” and has no exposure to Alameda.
The most at risk will be the company that lends assets to Alameda and the crypto project that the trading firm is heavily invested in, the current stake may be forced to sell in order to balance its books.
The firm is a major backer of the Solana blockchain, whose native token lost as much as 50 percent of its value against the dollar overnight on Wednesday, before paring losses in volatile trading.
“I don’t see the situation where [Alameda] come back from this. . . I think they are overestimating the value of those FTT tokens,” said one person familiar with the matter. “Alameda should be able to fix this if they really mean what they say, and this is a clear signal that they are not.”
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 is a well-respected company,” he said. “I think there will be a lot of firms that will have exposure to Alameda.”
The trading firm was founded in 2017 by Bankman-Fried to pursue arbitrage opportunities across different countries and centers in the nascent crypto asset market, and has since expanded its activities.
“Alameda came before FTX. It needs a balance sheet and it will provide liquidity in exchanges and receive spreads. It will also take directional bets as a prop trade,” said de Wet.
The scale of the pain will depend on whether Binance also backstops Alameda. Late Tuesday an FTX spokesman told the Financial Times that “Alameda is included in the agreement”.
Binance declined repeated requests to clarify its position. His silence is likely to reinforce the view of those in the market who think the trading firm will be allowed to fail.