“Not your keys, not your coins.” It’s a saying many of us have heard time and time again in the crypto market. For some of you, this is a lesson instilled in you far before the implosion of the once wildly popular FTX. For others, it’s a saying you’ve heard but chose to ignore and perhaps continue to ignore.
Objectively, there is no correct answer. Yes, your keys are significantly more likely to be safe from theft if held in self-custody. But Alex Kruger brings up a counterpoint that is very much true:
The beauty of the crypto market is that it is mainly unregulated is the same thing that creates danger and forces one to be cautious. The first half of November taught us that there is no perfect option, but exchanges certainly can’t be blindly trusted as they were by many before November 8th.
And whether you personally were financially impacted by the FTX fallout may have simply been the luck of the draw.
But regardless, the ultimate fear of a worst-case scenario has happened. Over 5 million people worldwide appear to have lost most or all of their funds that were being held on the exchange by Sam Bankman-Fried.
And this understandably has caused shockwaves throughout the crypto market that likely haven’t been close to fully realized yet.
Flocking Out of Exchanges
According to our latest poll, more than half of participating followers are now holding one-third or less of their coins on exchanges:
There is clearly some major distrust in terms of trader confidence to keep their funds on exchanges right now. And this is understandable.
FTX’s unprecedented bankruptcy is an objectively painful event for millions of traders, and we all have no choice but to be reactionary and perhaps even overcorrect with excessive cautiousness for the time being. This event’s closest comparison was in 2014, when Mt. Gox was officially disbanded.
There is an exploiter address that you can follow here, which is siphoning out FTX funds as of November 11th. There is a very valid crowd opinion that this may belong to Sam Bankman-Fried or someone close in his circle of trust:
It currently holds $308.3M in funds and will certainly be one that the crypto market, community and law enforcement should be following closely.
Crypto Market Participants in Panic Mode
In general, the big story is that FTT’s value was pushed to 0 by CZ Binance, who decided to sell his large portion of FTX’s native token, which was given to him as collateral to help FTX reach the heights that it did. Because of FTX irresponsibly meddling with user funds, the drop in FTT’s price left a debt on the exchange that was impossible to fulfill and immediately caused a liquidity crisis.
As a result of all of the drama and exchange FUD (beyond just FTX), discussions related to Bitcoin have taken a back seat again:
We can see that FTT’s social dominance (in gold on the far right) erupted since the second week of November (even prior to the official November 8th rug pull) as rumors were spreading about the exchange’s liquidity crisis. When discussions are related to exchange-related tokens, prices tend to become unstable.
And here is an illustration of just how much exchanges are now being talked about:
However, as many of our readers know, FUD can sometimes actually be a good thing for future market price movements. When the majority of the trading crowd anticipates further drops as a result of negative news, the increased bearish sentiment is often met with a surprise price rise just as fear as peaking.
And at least when it comes to whale behavior, it appears there is a serious push to “load up” with buying power:
This above chart has a bit of a two-sided story to it:
Binance USD (BUSD) and USD Coin (USDC) shark & whale addresses holding $100k to $10m have rapidly grabbed a large portion of the stablecoins. Tether (USDT) is also continuing its more gradual whale accumulation rise.
However, Bitcoin shark & whale addresses holding ~$1.7m to ~$170m are continuing to drop at an unprecedented rate, now holding a 4-year low ratio of the total available BTC supply
This certainly gives mixed signals. Although whales clearly aren’t showing as much confidence in holding Bitcoin, their rise in “buying power” through stablecoin accumulation indicates they may just be waiting for the right moment to pounce.
Getting Back to Normal
There is also speculation that both institutional and retail traders alike are going to be fearful of holding coins on exchanges going forward. However, the trading volume of the top 10 market cap assets has mainly just normalized in the week since the FTX collapse:
This may be giving validation that the vocal sentiment that “everyone is getting their funds off of exchanges” is a bit overblown and being given the impression of happening by a vocal and reactionary minority.
One thing we can say for certain is that there has been a clear break in the correlation between equity and crypto market:
The S&P 500 has recently climbed back up to 10-month high levels. On the other hand, cryptocurrency has hit a 2-year low, dropping below $17k for the first time since November 2020.
There are reasons to be optimistic and consider interpreting these unprecedented times as “blood in the streets” status. Realized losses have been mounting big time since the FTX-caused market-wide price drop:
The last time we saw an entire week of traders realizing this many consistent losses was mid-June. And after bottoming out on June 17th, Bitcoin rose 28% over the next four weeks.
We can also look at the shocking ratio of BTC transactions that are happening at a loss vs. at a profit. The blue bar below, if this low ratio continues heading into next week, would be the biggest proportion of transactions happening at a lower price than the initial received address price in our recorded history:
The previous weekly record happened in September 2019, when Bitcoin dropped 26% over the span of two weeks.
Whatever your take is about recent events, it is objectively true that this event was one of the worst imaginable scenarios for crypto traders. When the community no longer has trust in the safety of their coins, it typically will lead to stagnancy.
In the end, the increased interest in self-custody is a good thing. And this is a very dark reminder of how important the responsibility one has in their own funds. But exchanges are necessary to expand and grow crypto market caps and the entire sector. The demand for more transparency of exchange solvency and existing liabilities should ultimately lead to an improvement.
If exchanges are forced to listen by being threatened to lose a significant amount of their user base, it will ultimately lead them to be at least somewhat more upfront and ethical in how user funds are handled and protected going forward.
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