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Searching for a Bottom in Crypto After FTX

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Since the FTX debacle, crypto-related assets have gotten crushed. Crypto bears believe that a bubble has popped and some sanity is slowly being restored to financial markets. Maybe, but when fear and liquidity issues hit any financial asset, forced selling pushes prices down further and faster than fundamentals alone would imply.

Bears who don’t like crypto fundamentals should watch out for an end-of-fear bounce that typically follows events like the FTX bankruptcy. Crypto assets won’t go down in a straight line. Nothing ever does.

With all of the recent chaos, it’s still fair to ask what just happened. FTX founder Sam Bankman-Fried blamed a classic bank run. “There was too much leverage—more than I realized,” he tweeted on Nov. 15. “A run on the bank and market crash exhausted liquidity.”

Bank runs aren’t easy to understand, but everyone knows more about them than they realize, thanks to Frank Capra’s film It’s a Wonderful Life. Bailey Bros. Building & Loan experienced a run in that film. Jimmy Stewart’s George Bailey tried to reason with his customers, telling them the assets of his lender were essentially houses that couldn’t be converted into cash quickly.

FTX, Bankman-Fried’s brokerage, had about $9 billion in liabilities before it filed for bankruptcy. The asset side of its balance sheet held what turned out to be illiquid assets, including so-called Serum tokens that couldn’t readily be converted into cash without tanking the price.

Exactly how FTX found itself in this situation is for regulators and authorities to unravel. FTX didn’t respond to a request for comment about recent events or its balance sheet.

Serum tokens have dropped from roughly 80 cents to 25 cents in the fallout. Bitcoin, the biggest cryptocurrency, is caught up in all this, too, falling in value from roughly $20,000 to $16,000.

Those looking for a Bitcoin bounce might be disappointed. “Recent volatility in the cryptocurrency market has generated a long-term breakdown in Bitcoin below key support near $18,000,” wrote Fairlead Strategies founder Katie Stockton on Wednesday. She sees prices heading down around $14,000 in coming months.

CappThesis founder Frank Cappelleri sees some technical trading support for Bitcoin around $15,000, but like Stockton, he doesn’t observe a reason for a big post-FTX bounce. Cappelleri does note some support for
Coinbase Global
stock (COIN) at about $40, “which lines up with the May low point,” he tells Barron’s. Coinbase is a crypto broker, similar to FTX, and its shares were caught up in the crypto shock just like the cryptocurrencies.

Coinbase stock fell from roughly $75 to hit a post-FTX low of $40.68 on Monday. It now sits at around $44. The selling pressure might be over for now. (In this bank-run-like episode, Coinbase is actually the Bailey Bros. Building & Loan figure. Bailey was the victim of a run that started at the local bank.)

Traders looking to take advantage of market dislocations arising from nonfundamental selling pressure might want to look at Coinbase instead of the currencies traded on its platform.

Whether cryptocurrencies and brokerages are a good investment for the long run remains a heated debate. ARK Invest’s Cathie Wood says that Bitcoin will be worth $1 million apiece by 2030. Berkshire Hathaway Vice Chairman Charlie Munger calls crypto a combination of fraud and delusion.

The truth may well lie somewhere in between.

Write to Al Root at allen.root@dowjones.com


Credit: marketwatch.com

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