Kaiko, the leading provider of data on the cryptocurrency market, as it does every year has examined the most significant market events of the fourth quarter. In particular, we will focus on analyzing the collapse of FTX, the exchange whose former CEO is Sam Bankman-Fried, related to the Alameda Gap in liquidity.
Shortly thereafter, an in-depth analysis on the crisis of confidence towards the exchange Binance, which, following the market turmoil also derived from FTX, promptly reacted by showing its Proof of Reserves, as recommended by CEO Changpeng Zhao. Even so, the problems did not go away for the world’s leading blockchain exchange either.
FTX’s collapse analyzed by Kaiko: liquidity drop in all markets
The tragic end of the FTX exchange starts in November, when CoinDesk published an article examining the financial statements of Alameda Research, the trading firm founded by SBF and closely affiliated with FTX.
In the article, CoinDesk had found that Alameda held nearly $6 billion in locked and unlocked FTT tokens, a cryptocurrency created by FTX. Thus, FTX filed for bankruptcy a week after the publication and SBF was arrested a month later on charges related to the illegal commingling of FTX customers’ funds.
Going back to FTT, looking at the liquidity for the token, one can immediately see that it was overvalued, with only $6 million depth on the supply side. According to Kaiko, this is nowhere near enough liquidity for Alameda to sell a significant amount of tokens without collapsing FTT, meaning that he had vastly overvalued the value of his assets and was almost certainly underpricing them.
When the price of FTT began to fall, it became clear that both entities were insolvent. Notably, FTT liquidity was withdrawn from exchanges hours before the price dropped below $20, suggesting that market makers may have known that the Binance and FTX deal had collapsed before it was even announced.
Turning to Alameda Research, we know that it was once one of the largest cryptocurrency market makers, providing billions of dollars of liquidity for both high and low-cap tokens.
We now know that their entire trading operation was financed by funds taken directly from FTX’s customers.
When the FTX/Alameda entity collapsed, a sharp drop in liquidity emerged in all markets, as measured by 2% market depth. Not only did Alameda stop market making activities, but many of the major cryptocurrency market makers were affected by the FTX collapse and also reduced trading activity on other exchanges.
Wintermute, Amber Group, and Genesis have all announced that they have stranded funds on FTX, probably in the hundreds of millions of dollars range. The Alameda Gap thus refers to the drop in liquidity on all exchanges following the crash.
Even Binance under the Kaiko spotlight: liquidity not fully recovered
One of the immediate winners from the FTX collapse was Binance and its volume market share. In the days leading up to the FTX collapse, the popular exchange controlled 59-60% of the market.
Approaching the end of the fourth quarter, Binance appears to have gained almost all of FTX’s 6-8% market share, now controlling 68% of the trading volume compared to twenty-two other exchanges.
In addition, Binance suffered a slight drop in market share during the mid-December confidence crisis, but the CZ company has largely recovered since then. Coinbase, another prestigious exchange in the blockchain world, also experienced a slight increase in market share, from 6-7% to 8-9%.
This could be a lasting trend in 2023, according to Kaiko, as customers pay more attention to the regulation and transparency of centralized platforms. Regulated exchanges could therefore be the long-term winners in the FTX collapse.
In any case, we see that on 29 September Binance began automatically converting USDC, USDP, and TUSD user deposits into BUSD, the exchange’s stablecoin.
The stated purpose of this change was to improve overall liquidity by consolidating the order book. Users can still deposit and withdraw these stablecoins, although all associated trading pairs have been deprecated. In addition, USDC, USDP, and TUSD accounted for just over 2% of BTC and ETH trading when they were deprecated.
The market share of BUSD volume on Binance steadily increased from 32% in October to 38% in December compared to USDT. Altcoin market share was more volatile, falling from 24% to 44%, although it increased from 30% in October to 35% in December.
Spreads for the top USDT and BUSD pairs are almost identical, suggesting that Binance is engaging market makers to ensure that BUSD pairs are competitive with USDT pairs.
Finally, in early December, a flurry of rumors began circulating about Binance’s solvency following an unsatisfactory report on the exchange’s Proof of Reserves and potential legal problems in the United States.
The exchange continued to operate normally, except for a brief pause in USDC withdrawals. However, market makers did not stick around to test their luck, causing a decline in market depth for BTC and ETH trading pairs. So, Kaiko’s conclusion is clear: liquidity has not yet fully recovered.