JPMorgan says FTX collapse fallout could cut the value of cryptocurrencies in half before it's over

Published Thu, Nov 10 20221:15 PM EST

It's been a wild week for cryptocurrencies, and the plunge in the asset class may be far from over, according to JPMorgan. The tumult stems from the potential collapse of crypto-exchange FTX, which was in the process of being acquired by Binance, amid a liquidity crisis. On Wednesday, Binance backed out of the deal, leaving FTX near collapse. Cryptocurrency assets have tumbled, with bitcoin shedding more than 20% this week alone. At the end of this latest deleveraging cycle, the asset class could see its value cut in half. "With the crypto market cap standing at just above $1 trillion before the FTX/Alameda Research collapse, our guess is that the crypto market will find a floor above $500bn in the current deleveraging phase," wrote JPMorgan analyst Nikolaos Panigirtzoglou in a Wednesday note. Downside pressure Another way of thinking about the downside in crypto prices from their current level is bitcoin production cost, he said, since it's historically acted as a floor for the price of the asset. Currently, bitcoin production cost is $15,000 but could revisit the $13,000 low it hit over the summer. "A production cost of $13k implies 25% downside from here which would bring the crypto market cap to a low of $650 billion," said Panigirtzoglou. Of course, it may take a few weeks for this deleveraging cycle to bottom, unless a rescue is orchestrated quickly, meaning losses in crypto assets might feel slow. And, the total hit to market capitalization in the asset class will likely not be as bad as it was post-Terra, which collapsed between May and June, according to JPMorgan. Industry changes Still, the new phase of deleveraging is more problematic than the last time this happened to a crypto exchange, as the number of entities with balance sheets strong enough to rescue companies in trouble — those with low capital and high leverage — is shrinking. "FTX and Alameda Research had emerged last May/June as the main entities with apparently strong balance sheets to rescue weaker and more leveraged entities such as BlockFi, Voyager Digital and Celsius," said Panigirtzoglou. "Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue," he added. Going forward, it's highly likely that the collapse of FTX will increase investor and regulatory pressure on crypto companies to disclose more information about their balance sheets, he said. This will be with the goal to safeguard client assets, limit asset concentration and create more diligent risk management, including counterparty risk among crypto market participants.