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November 9, 2022 World

Why is the crypto market down today?

Crypto prices are falling as investor fears over FTX’s solvency and the state of customer funds send BTC and ETH price toward new lows.

Crypto prices are falling across the board on Nov. 8 as potential contagion from the FTX and Alameda controversy impact the entire crypto market.

Earlier in the day, Bitcoin BTC $18,384, Binance coin
BNB $326, Ethereum ETH $1,323, FTX token FTT $5.93, and Solana
SOL $23 had seen sharp rebounds after news that Binance would acquire FTX, but the bounce was short-lived.

At the time of writing, FTT dropped below the $7 mark, registering a 70% loss on the day. Solana price is also under pressure, facing an 18% correction as it trades below $25. After the Binance FTX news broke, BNB looked set to be the winner of the day, but the market-wide downturn did not spare the exchange token, which currently trades at $328, reflecting a 2.6% loss.

Concerns over the FTX balance sheet have caused the market to take a sharp turn downward after initially the Binance LOI for FTX brought the markets upward. According to reporting, FTX was apparently seeking to raise $6 billion dollars in financing to fill the gap in their balance sheet, putting the deal potentially in jeopardy.

“One person briefed on the fundraising blitz said what started as a $1bn ask was looking more like $5bn-$6bn by midday.” — Liz Hoffman (@lizrhoffman) November 8, 2022

Fears of a bank run spook the market
The May 2022, Terra Luna bank run and ultimate collapse of LUNA Classic reverberated through the cryptocurrency market, at the time bringing about the first 7-week losing streak in Bitcoin’s history.

Analysts are drawing parallels between the current FTX bank run, the perceived large budget hole and what happened to Terra Luna earlier this year. These fears are adding ton investors’ fears about the cryptocurrency industry at large.

The persistent threat of regulation
The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets.

Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.

The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.

Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.

After the FTX debacle, regulators may begin to step up strict enforcement as signalled by Germany announcing they are looking into Coinbase’s business practices.

Scams and Ponzis triggered liquidations and repeat blows to investor confidence
Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.

The implosion of Terra’s LUNA and Celsius Network as well as misuse of leverage and client funds by Three Arrows Capital (3AC) were each responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.

As the Terra and LUNA ecosystem collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring within Terra — and investor sentiment tanked.

The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, erasing tens of billions in investor and protocol funds.

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