The crisis at now-bankrupt cryptocurrency exchange FTX and an ensuing meltdown in digital asset prices have spurred a "mass exodus" as nervous customers withdraw crypto from exchanges. Some investors may be leaving the space altogether.
FTX, once the second-largest crypto exchange, went bankrupt on Nov. 11 . Its collapse, which took place just over a week after concerns over its financial health began, left stranded what is likely billions of dollars in customer funds. More than a million creditors are on the hook.
Founder and former CEO Sam Bankman-Fried said in the days before his company's failure that "assets are fine" and that the platform was processing withdrawals as usual. Still, investors hurried to get their funds off the platform in a pattern similar to a bank run that delivered the death blow to FTX.
Now, users of other exchanges are taking heed of the risk, pulling out cash despite reassurances that their assets are safe. The crypto aphorism "not your keys, not your coins," referring to the risk of having someone else hold digital assets, sums up the prevailing view.
"A mass exodus of retail off centralized exchanges is underway," analysts at crypto exchange Bitfinex wrote in a note Monday. "Every development that suggests that a particular exchange is in trouble is a catalyst for depleting balances on exchanges."
Data show that Bitcoin continues to flow out of exchanges at a breakneck pace. Some 2.3 million Bitcoin -- or almost $40 billion at current prices -- remain on exchanges, down from a high of 3.1 million, or more than $50 billion . While some tokens are heading for "cold storage," or wallets that users control directly, signs also point to some traders quitting crypto entirely.
"This trend has been in place since FTX insolvency rumors first emerged, " the Bitfinex analysts said. "This might result in discouraged retail investors being removed from the crypto industry in general, as self-custody wallet balances have not surged at par with the depleting exchange balances."
The feeling in crypto is so gloomy that some investors are completely throwing in the towel. The question that remains is whether FTX's collapse is just another relatively unusual shock driving prices lower, or if it represents a turning point that could bring a tough new regulatory regime.
"As the dust settles following the collapse of FTX, the aggregate response of Bitcoin holders is slowly becoming clearer. A key question is whether the recent sell-off can be better characterized as simply a continuation of the bearish trend, or perhaps a trigger of a deeper psychological shift amongst investors," analysts at crypto intelligence group Glassnode wrote in a note Monday.
It is possible, of course, that the scale of gloom itself may be a sign that this bear market has reached its bottom. Some traders are betting on that notion.
"One consistent event which motivates the transition from a bear back towards a bull market is the dramatic realization of losses, as investors give up and capitulate at scale," said the team at Glassnode. "The FTX fallout has triggered one of the largest capitulation events in Bitcoin history, flushing billions of U.S. dollar value out of underwater investors...There are barely any precedents."
