Mergers & Money: FTX-Induced Crypto Contagion Likely Only Starting

Editor’s note: Mergers & Money is a monthly column by Senior Reporter Chris Metinko that covers dealmaking and the flow of venture capital.

It was just last November when crypto prices were at an all-time high and the industry seemingly couldn’t have been hotter.

Today, the entire sector is stuck in a deep, dark winter, and it looks like a sickness is only starting to set in — mostly brought on by the spectacular implosion of Sam Bankman-Fried’s FTX exchange.

FTX’s tentacles reached nearly everywhere in the crypto industry. It invested in nearly 50 companies through its venture arm, FTX Ventures. It also made another 180 investments through Bankman-Fried’s other trading firm Alameda Research.

It also had a deep reach in the crypto lending space — which has taken off in recent years as prices soared and lenders could bring in new customers with the promise of high yields on their deposit.

It all was going well — until it wasn’t.

3AC should have served as a harbinger

Some lenders ran into trouble this past summer after crypto hedge fund Three Arrows Capital’s (3AC) collapse. The significant downturn in the digital currencies market left Singapore-based 3AC unable to meet obligations to lenders and barreling into bankruptcy.

In the wake of that collapse, crypto lenders Celsius Network and Voyager Digital also were forced to file for bankruptcy as 3AC defaulted on loans.

The bankruptcies rattled the market. However, crypto was able to find its equilibrium again — in part thanks to FTX which pledged to make further investments in infrastructure players hurt by 3AC, including to buy the assets of Voyager Digital for $1.4 billion.

The white knight is dead

Those promises turned sour this month. During the 3AC collapse, Bankman-Fried’s firms were also shown to be huge borrowers from these lenders, using FTX’s FTT token as collateral.

That should have raised red flags in an industry that just went through a tumultuous moment with 3AC.

Of course, it did not.

However, the house of cards came tumbling down earlier this month when FTT witnessed a major sell-off after reports came out that Alameda had a large portion of FTT on its balance sheet, helping prop up its value. FTT has lost more than 90% of its value since.

FTX collapsed, and now several lenders the crypto exchange was involved with seem to have their own significant financial instabilities some may not be able to overcome. Those firms include:

• Crypto lender Genesis said last week it is suspending withdrawals and new loans after FTX’s collapse, noting a “loss of industry confidence caused by the FTX implosion.” The announcement comes just days after New York-based Genesis sent a letter to its clients letting them know it was able to secure an equity infusion of $140 million from Digital Currency Group. Genesis said it had about $175 million of assets locked away on FTX’s exchange — as reported by The Block.
• Genesis’s announcement started a chain reaction, as Cameron and Tyler Winklevoss’ Gemini said it would halt redemptions. Genesis was a partner. “The past week has been an incredibly challenging and stressful time for our industry,” Gemini officials wrote in a blog post.
• Almost immediately after FTX’s bankruptcy filing, Voyager said it is “evaluating strategic options” and reopening the bidding process for its assets. The lender said about $5 million in a “good faith” deposit from FTX was being held in escrow, but Voyager maintained a balance of approximately $3 million on FTX’s embattled exchange.
• Crypto lender BlockFi has suspended withdrawals on its platform and is reportedly in the process of preparing to file for bankruptcy. In July, FTX gave BlockFi a $400 million revolving credit facility that included an option to buy BlockFi for up to $240 million. In March 2021, BlockFi raised $350 million at a valuation of $3 billion co-led by Bain Capital Ventures, partners of DST Global, Pomp Investments and Tiger Global.

This could be just the tip of the iceberg. Three Arrows Capital’s issues disrupted a few lenders and rattled the industry. FTX seems to have ties that run much deeper.

Aside from just the lenders, those who do business with them likely could be affected. It also was revealed over the weekend, FTX owes its 50 biggest creditors nearly $3.1 billion. The exchange owes about $1.45 billion to its top 10 creditors.

Just a year ago, people were wondering how high the crypto industry could go.

Now people are wondering how long this crypto contagion will last.

Related reading

Read our coverage of all the FTX-related events and more below:

• Binance Signs Letter Of Intent To Buy FTX.com
• Binance-FTX Deal A No-Go
• Just Like FTX, FTX Ventures Went Big — And Fast — When It Came To Investing
• After The FTX Collapse, This May Be A Good Time For VCs To Start Using ‘Common Sense’ Again
• FTX Collapse Will Reverberate Throughout The VC World For A Long Time
• Genesis Halts Withdrawals As FTX-Induced ‘Crypto Contagion’ Spreads

Illustration: Dom Guzman

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