The Unraveling of FTX’s Ponzi Scheme Has Decimated Liquidity in Solana (SOL)
This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
The FTX saga continues to create cascading problems for the entire crypto sphere, with deteriorating liquidity and market depth affecting not only crypto bigwigs such as Bitcoin and Ethereum but also altcoin heavyweights, including Solana’s SOL coin, Serum (SRM), and MAPS coin.
As most of our readers would know by now, FTX’s founder, Sam Bankman-Fried (SBF), ran a Ponzi scheme to the benefit of Alameda Research, the trading arm of his once-sprawling crypto empire. In essence, FTX transferred its native FTT tokens to Alameda at dirt-cheap prices while, at the same time, the exchange inflated FTT’s value by utilizing a part of its revenues to burn a fraction of the token’s circulating supply. Alameda then used its FTT tokens as collateral to borrow client funds from FTX, which were then used to place leveraged bets. This gig ended once Alameda’s exposure to the FTT token became public knowledge, prompting Binance to start dumping its own FTT stash, collapsing the token’s price in the process. This resulted in a bank run as clients tried to exit the Ponzi scheme-promoting exchange, eventually resulting in FTX declaring bankruptcy last week.
The collapse of Alameda Research is creating tangible problems for the crypto sector. After all, Alameda, along with Wintermute, Amber Group, B2C2, Genesis, and Cumberland, constituted the crypto sector’s largest market makers, providing by far the greatest proportion of liquidity. Now that Alameda Research has gone offline at a time when the funds of Amber Group, Wintermute, and Genesis are trapped within the bowels of FTX, it is hardly surprising that crypto liquidity is hemorrhaging.
Kaiko Research has now published a dedicated blog to highlight this crypto-wide evaporation of liquidity. For the reference of our readers, when talking about liquidity, Kaiko is predominantly referring to the market depth, which measures the richness of orders at the top of a coin’s order book. The greater the market depth, the higher the dollar value of a trade required to move the price of a particular coin.
The “Alameda Gap” in crypto liquidity could be felt for a long time.
— Kaiko (@KaikoData) November 15, 2022
According to Kaiko, since the 05th of November, the quantity of bids and asks that lie within 2 percent of Bitcoin’s mid-price for USD(T) pairs across 18 exchanges has fallen from 11,800 BTC to just around 7,000 BTC, constituting a drop of 40.7 percent. Ethereum has also witnessed a pronounced decrease in its market depth.
#altcoin liquidity has suffered the most.
— Kaiko (@KaikoData) November 15, 2022
Here, though, Solana’s SOL coin is in a league of its own. To wit, the market depth of the SOL coin across the 9 exchanges tracked by Kaiko has fallen from 1 million SOL to just around 0.5 million SOL, corresponding to a 50 percent plunge.
Early draft of what the asset side looks like.. likely a few inaccuracies/things missing
Looks like SBF was also the accountant (2.1b SRM? lol) pic.twitter.com/yo5SJFcrus
— minigrogu (@minigrogu) November 11, 2022
Of course, we noted last week that Solana’s native coin remained particularly vulnerable to FTX-related gyrations not only due to the project’s close association with SBF but also its hefty exposure. To wit, as per the asset tally of Alameda leaked by an insider in the tweet above, the now-defunct trading firm held nearly a billion dollars’ worth of SOL coins on its balance sheet – $981 million, to be exact.
It is hardly surprising, therefore, that the SOL coin has been eviscerated over the past 1 week.
Meanwhile, the blowback from FTX’s default keeps growing. The crypto hedge fund Ikigai has revealed that the majority of its assets are currently trapped within FTX. Similarly, Sino Global Capital has now confirmed that its exposure to FTX ran in “mid-seven figures.” SoftBank has also written down its $100 million investment in FTX. Moreover, BlockFi has so far only commented that it has a “significant exposure” to the SBF’s exchange. We expect this list to keep growing over the next few days as DeFi firms slowly disclose the true extent of their synergies with FTX.
Following the collapse of FTX, we’ve just experienced the largest week over week decline in #bitcoin on exchanges ever:
-115,200 BTC pic.twitter.com/BPa5LXpz9d
— Dylan LeClair 🟠 (@DylanLeClair_) November 14, 2022
Meanwhile, the FTX saga has resulted in an explosive off-exchange migration. For instance, the balance of Bitcoin held on exchanges has now declined by a whopping 115,200 BTC week-over-week. As for the lone bright spot, such a large migration off-exchange will decrease Bitcoin’s selling pressure in the coming days.