With Bitcoin, Ether And Altcoins Drowning In A Sea Of Blood, Can Investors Hope To Catch A Falling Knife?

The cryptocurrency market continued its downward trajectory on Thursday morning, reeling under the implications of a failed deal between cryptocurrency exchange Binance and its rival FTX, with prices of major digital assets, including altcoins, trading at levels not seen since November 2020.

The world’s largest cryptocurrency Bitcoin BTC/USD fell as low as $15,663 on Wednesday before paring some of its losses and stabilizing around the $16,900 mark. It is down about 3% over the last 24 hours.

Similarly, Ethereum ETH/USD made a low of $1,087 before crawling up to trade at $1,200 levels, still down 2%.

Wild swings are being witnessed in the crypto markets as investors remain jittery over possible ramifications of the fallout of Binance’s acquisition deal with FTX.

Market participants heaved a sigh of relief that the Sam Bankman-Fried-led crypto exchange will be saved from a liquidity crunch once acquired by Changpeng Zhao’s Binance.

Their jubilance was short-lived as less than 24 hours later, Binance took a U-turn and announced that it has decided not to pursue the proposed acquisition of FTX owing to corporate due diligence, news reports about improper handling of user cash and ongoing probes by U.S. agencies.

Why Fear A Liquidity Crunch?

According to a Coindesk report, the native FTX Token FTT/USD, which are also owned by the company, were found to be in large quantities on the balance sheet of Alameda Research, a cryptocurrency trading company run by Bankman-Fried, prompting widespread criticism of the token.

This meant that rather than relying on a standalone asset like fiat currency or another cryptocurrency, Alameda was mostly reliant on a coin its sister firm created.

Market participants liquidated FTX-linked coins to limit their potential losses as they scrambled for safety amid rumors that FTX will file for bankruptcy.

The problems of an already troubled market were exacerbated when FTX's rival Binance, which has more than $500 million worth of FTT on its books, started to sell off its holdings.

Also read: Binance CEO Says No 'Master Plan' To Take Over FTX, Warns Employees 'DO NOT Trade FTT Tokens'

The hot-and-cold relationship between the two crypto stalwarts, Binance CEO Zhao and FTX chief Bankman-Fried, shook market confidence, as investors fretted over every development in an industry already licking its wounds dealt by the collapse of Terraform Labs, Three Arrows Capital and Celsius Network.

Meanwhile, other major cryptocurrencies such as Binance BNB/USD, Ripple XRP/USD, Cardano ADA/USD, Dogecoin DOGE/USD, and Solana SOL/USD were trading with significant losses of 8%, 3%, 1%, 8% and 19%, respectively, at the time of writing.

What Happens To Cryptos Next?

Ben Waterman, co-founder and COO at Strabo, says that if people are already invested, they would do best to “sit tight,” as the market is far enough into a downturn already and a large portion of the decline has already occurred. 

“Don't try to catch a falling knife, as the saying goes. The time to figure out an appropriate allocation was when you started investing! If you were sensible about the crypto coins you selected, these will likely persist through the downturn simply due to the amount of institutional capital that is now invested,” he says.

Charlton Haupt, CEO of Bad Astro Society, says the bottom of the bloodbath will be confirmed when Bitcoin passes the 200-day moving average, currently around $25,000, and uses it as support.

This, along with higher highs and lower lows, will signal to both long-term and short-term traders that the bottom is in.

“Best case price scenario is that these are the lows and we only go up from here. Worst case scenario, we see another leg down to visit between $12,000 and $14,000,” according to Haupt.

Guneet Kaur, a Research Scholar (Digital Currencies) at the University of Stirling, says an opportunity lies in every downturn for certain categories of investors and ideally, new investors can reduce the average size of holdings by buying a dip at a low price.

The actions must be driven by investment goals, she says.

“The upward trend displayed by most cryptocurrencies in the last week and the crypto market resilience is indicative of a green light going ahead. Again, as the past does not ensure the future, one needs to be rational while dealing with uncertain circumstances,” Kaur said. 

Sam Kim, founding partner at Sukuma Ventures, says the future outlook for investors is rocky judging on the present situation and that investors should look into decentralization and DeFi protocols more seriously.

“Data onchain is the more transparent way to forecast, track and handle future financial mishaps,” Kim says.

Next: Billionaire Mike Novogratz Takes Another Hit: First Luna, Now FTX Is Costing His Crypto Firm Millions