FTX’s collapse will likely lead to an extended crypto winter

The collapse of crypto exchange FTX derailed an emerging positive situation in cryptocurrency markets after the significant deleveraging of May and June left few, if any large, marginal sellers in the digital assets space, Coinbase (COIN) said in a research report Tuesday.

The new turbulence in the cryptocurrency market and the lack of large buyers has left the sector vulnerable, potentially extending what was an already long crypto winter, analysts David Duong and Brian Cubellis wrote.

FTX bankruptcy proceedings will be closely watched, but for the digital assets sector, a lot still depends on the path of interest rates in the U.S, the report said.

The market is highly likely to see “second order effects” arising from the unraveling of FTX, as it emerges which counterparties have lent or interacted with either the exchange or its sister company, Alameda Research, and what those exact liabilities are, the note said.

Coinbase says poor liquidity could last till at least the end of the year, noting that stablecoin dominance has risen to a very high 18% of the total crypto market cap, which itself has dropped to around $800 billion as of Nov. 12 from about $1 trillion at the end of last month. Stablecoins are a type of cryptocurrency whose value is pegged to another asset, such as the U.S. dollar or gold.

“The combination of increasing hashrate (pushing up the difficulty as a result), rising energy costs and now weaker bitcoin prices has led to increasingly stressed economic conditions for bitcoin miners,” the note said. Hashrate is a measure of computing power devoted to mining bitcoin, and as the hashrate increases, so does the difficulty of producing the cryptocurrency.

FTX’s demise has undoubtedly damaged investor confidence in the sector and remediation will take some time, potentially extending the crypto winter by several more months, perhaps through to the end of 2023, the note added.