The bankruptcy of the FTX exchange has left the crypto community in shock. The exchange filed for bankruptcy on Friday, with the bankruptcy filing including more than 130 related entities, showing that FTX had a deep reach within the corporate crypto world.
The collapse of FTX and Alameda
Before its collapse, FTX was one of the largest cryptocurrency exchanges globally by trading volumes. Its sister company, Alameda, was also a leading crypto fund. However, the strange relationship between the two companies has been attributed to the liquidity crunch that forced the exchange to go out of business.
One of the most peculiar things that have come to light amid this entire fiasco is that the former CEO of FTX, Sam Bankman-Fried, had created a backdoor to channel funds between FTX and Alameda Research without being detected by auditors.
Alameda was a major market maker in the crypto space, offering billions of dollars worth of liquidity to different projects. However, the recent revelations show mismanagement of client funds by FTX and Alameda. Nevertheless, the collapse of Alameda has raised questions over what the effect will be on crypto market liquidity.
The liquidity in the crypto market is dominated by only a few companies, including Genesis, Cumberland, B2C2, Amber Group, and Wintermute. Alameda was one of the firms on this list, and its collapse will have a dent in liquidity in the space.
A Kaiko report identifies this drop in liquidity as the “Alameda Gap.” This gap could widen amid the losses other market makers have suffered following the fall of FTX. Genesis, Amber Group, and Wintermute have already admitted that they had funds in FTX. The funds stuck on the defunct exchange could affect these companies’ market-making capabilities.
In normal market conditions, liquidity drops during periods of intense volatility as market makers rush to manage risks. However, the past week has seen a drastic drop in liquidity, which is larger than what has been seen in other bear markets, indicating that the Alameda Gap could wreak havoc in the short term.
FTX collapse increases volatility in crypto derivatives
Besides denting the liquidity in the crypto markets, the collapse of FTX has also caused a rise in volatility for crypto derivatives. The past week was one of the most volatile in the history of crypto markets, with Bitcoin and Ether registering their largest single-day drop in over five months.
During the week, the perpetual futures open interest dropped by double-digits amid intense volatility in spot prices. The wild price action triggered liquidations of $875 million worth of long positions.
The Bitcoin open interest in five exchanges dropped from $8 billion to $5.5 billion, while that of Ether dropped from $4 billion to $3 billion. The collapse of the FTX exchange is expected to have long-lasting effects on the derivatives market, given that in early November, the exchange accounted for 14% of the total Bitcoin open interest and 28% of the total Ether open interest.
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