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Cryptocurrencies pressured as investors digest FTX fallout; Solana loses another 30%

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Bankruptcy filings from Celsius and Voyager have raised questions about what happens to investors’ crypto when a platform fails.

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Cryptocurrencies were under pressure for a second day Wednesday as the market digested the fallout of Binance’s planned bailout of FTX.

Bitcoin was last down by 5% to hit a new bear market low of $17,019.14, according to Coin Metrics. It hit its all-time high of $17,585.25 one year ago Thursday. Ether, fell 10% to $1,152.34.

The Solana token continued its slide. It was last down 30%, after plunging 26.4% on Tuesday. Alameda Research, the trading firm owned by Sam Bankman-Fried, who also runs FTX, was a big and early backer of the Solana project.

“Market factors such as providing SOL token liquidity as well as support for Solana ecosystem projects on FTX exchange has been an important driver for Solana’s success,” Bernstein’s Gautam Chhugani said in a note Wednesday. “This is an adverse event for the Solana ecosystem in the short run. Further, given FTX/Alameda’s balance sheet situation, there may be near term pressure on its Solana holdings, as the situation resolves.”

The crypto market briefly spiked on Tuesday after Bankman-Fried, also known as SPF, announced that Binance will acquire its non-U.S. operations but plummeted shortly after.

The SBF empire unraveled quickly after a report last week showed a large portion of Alameda’s balance sheet was concentrated in FTX Token (FTT), the native token of the FTX trading platform. After some sparring on Twitter with SBF, Binance CEO Changpeng Zhao announced his company was offloading the FTT on its books, leading to a run on the popular FTX exchange and a liquidity crisis.

FTT was down 10% Wednesday, after tumbling more than 75% the day before.

The bombshell is likely to set the crypto industry back, but to what extent remains to be seen. Analysts foresee further regulatory scrutiny of offshore exchanges, where the majority of crypto derivatives trading takes place. It’s also unclear how much financial contagion will spill into the rest of the market.

Additionally, Bankman-Fried had recently been lauded as a “white knight” in the industry as he came to the rescue of crypto services firms like BlockFi and Voyager that almost didn’t survive the crypto contagion of this spring.

For newcomers to the crypto market, he and FTX became the faces of the industry, securing the naming rights to the Miami Heat basketball team’s stadium last year, bringing Tom Brady and Giselle Bündchen on as ambassadors of the company, and becoming a megadonor to Democratic politics.

“Given the public-facing nature of FTX CEO Sam Bankman-Fried and the size of FTX, we believe that the week’s events could cause some loss of consumer confidence in the crypto industry, beyond that seen in the aftermath of the 3AC, Celsius, and Voyager events that took place earlier this year,” especially if contagion takes hold and crypto prices keep dropping, KBW analysts said in a note Tuesday. “It may take time for customers to regain trust in the industry, broadly speaking (and we think regulation could help this).”

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Crypto scams cost people more than $1 billion since 2021: FTC

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The crypto market can be volatile, but it’s still attractive to young people who have “higher risk appetites,” said Chris Adam of SharpRank.

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More than 46,000 people say they lost over $1 billion in crypto to scams since the start of 2021, according to a report released by the Federal Trade Commission on Friday.

Losses last year were nearly 60 times what they were in 2018, with a median individual loss of $2,600.

The FTC notes that the top cryptocurrencies people said they used to pay scammers were bitcoin (70%), tether (10%), and ether (9%).

One key feature of cryptocurrencies like bitcoin is that payment transfers are final and can’t be reversed. This isn’t always a good thing. Chargebacks — a type of tool designed to protect consumers — allow consumers to reverse a transaction if they claim they have been fraudulently charged for a good or service they did not receive.

Nearly half the people who reported losing crypto to a scam since 2021 said it started with some kind of message on a social media platform. The top platforms mentioned in these complaints were Instagram (32%), Facebook (26%), WhatsApp (9%), and Telegram (7%).

Fake investment opportunities were by far the most common type of scam. In 2021, $575 million of crypto fraud losses reported to the FTC related to investment opportunities. People reported that investment websites and apps would let them track the growth of their crypto, but the apps were fake, and when they tried to get their money out they could not.

“There’s no bank or other centralized authority to flag suspicious transactions and attempt to stop fraud before it happens,” the FTC warns in its report. “These considerations are not unique to crypto transactions, but they all play into the hands of scammers.”

Romance scams are the second-most common source of crypto fraud losses, followed by business and government impersonation scams, which the FTC said can often start with fake messages purporting to be from tech companies like Amazon or Microsoft.

Younger consumers were more likely to be taken in by crypto scams. The FTC reports that people aged 20 to 49 were more than three times as likely as older age groups to report losing crypto to a scammer.

To avoid being scammed, the FTC says, people should understand that cryptocurrency investments never have guaranteed returns, avoid business arrangements that require a crypto purchase, and watch out for romantic come-ons accompanied by a crypto solicitation.

The news comes after a tumultuous few weeks in the crypto markets. A failed U.S. dollar-pegged stablecoin helped drag down the entire crypto asset class, erasing half a trillion dollars from the sector’s market cap and denting investor confidence in the process. Many institutional and retail investors got wiped out, and for the most part, there are no backstops from the FDIC, nor any other consumer insurance protections.

Billionaire bitcoiners Cameron and Tyler Winklevoss recently announced layoffs at crypto exchange Gemini, citing the fact that the industry is in a “contraction phase” known as “crypto winter,” which has been “further compounded by the current macroeconomic and geopolitical turmoil.”

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20% of my portfolio is in crypto

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Celebrity investor Kevin O’Leary told CNBC on Friday that one-fifth of his investment holdings are tied up in cryptocurrencies and companies operating in the nascent digital asset industry.

“I have millions of dollars, 20% of my portfolio is now in cryptocurrencies and blockchain,” O’Leary said in an interview on “Squawk Box.” Blockchains are the distributed digital ledgers on which cryptocurrencies run.

Cryptocurrencies have attracted considerable attention and investment in recent years, including from large institutions and high-profile figures like hedge fund manager Paul Tudor Jones and fund manager Bill Miller. Many tout bitcoin, the world’s largest cryptocurrency by market value, as a long-term store of value. There’s a raft of other, smaller digital tokens, too.

Crypto backers say it remains early earnings for the industry — bitcoin itself has only been around since January 2009. Still, crypto startups are attracting billions of dollars of venture capital.

At the same time, the burgeoning asset class remains volatile, and regulators like Securities and Exchange Commission Chairman Gary Gensler have warned about its “highly speculative” nature and the lack of investor protection. The outgoing chair of the U.K.’s financial regulator also has warned about pump-and-dump schemes in certain digital tokens.

Among crypto’s detractors, billionaire businessman Charlie Munger, a longtime partner of Warren Buffett and a Berkshire Hathaway vice chair, has also been critical of digital currencies and their volatility. In February, he said he wishes the U.S. had banned them. Buffett is no fan either, calling bitcoin in 2018 “rat poison squared.” Others have likened bitcoin to a Ponzi scheme.

Asked by CNBC’s Andrew Ross Sorkin whether some cryptocurrencies will not even be around in a decade, O’Leary said he’s taken that risk factor into consideration.

“You have to be diversified. I own 32 different positions, including equity FTX itself,” O’Leary said while disclosing he’s a paid spokesperson for the cryptocurrency exchange, founded by 30-year-old billionaire Sam Bankman-Fried.

“The whole point is, you don’t know who is going to win. Is Ethereum going to win? Is solana going to win? Is it Helium or is it Avalanche? I own them all,” said O’Leary, who is a co-host of “Shark Tank” and makes other venture capital investments. He’s also the founder and chairman of O’Shares ETFs.

O’Leary’s comments Friday come two days after President Joe Biden signed an executive order that directs the U.S. government to analyze the cryptocurrency industry. The administration says the order’s goal is to both address risks while “harnessing the potential benefits of digital assets and their underlying technology.”  

“It wasn’t an all out ban, so that’s good news,” O’Leary said. However, he expressed concerns about the way Biden’s directive includes an emphasis on climate risks associated with cryptocurrency.

The act of mining bitcoin — which, in practice means running computers to verify transactions across the blockchain network — requires a lot of power. As a result, critics have lamented the carbon footprint of bitcoin mining.

O’Leary said he’s invested in at least one private bitcoin mining facility. However, he said he sold his positions in publicly traded bitcoin mining firms after Biden’s executive order.

Disclosure: CNBC owns the exclusive off-network cable rights to “Shark Tank.”

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Bitcoin (BTC) price slumps to 3-month low

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Bitcoin dropped to a three-month low late Thursday amid jitters over U.S. monetary policy tightening and an internet shutdown in Kazakhstan, the world’s second-biggest bitcoin mining hub.

The price of bitcoin fell to $41,222.41 just after 9 p.m. ET Thursday, reaching its lowest level since Sept. 29, according to data from Coin Metrics. It was last trading down 0.6% at a price of $42,391.20 Friday morning.

The world’s largest cryptocurrency began falling earlier this week after the minutes from the Federal Reserve’s December meeting hinted the U.S. central bank would dial back its pandemic-era stimulus.

The hawkish comments triggered a sell-off in global stock markets which spilled over into cryptocurrencies. Bitcoin bulls often describe it as an asset that is uncorrelated to traditional financial markets, however experts have noticed growing parallels in the price movements of bitcoin and stocks.

Other digital currencies continued to slide Friday, with ethereum shedding 2.3% and solana falling 4.7%.

Another piece of news weighing on crypto prices is the Kazakhstan president’s move to shutter internet service following deadly protests against the government.

The Central Asian country accounts for 18% of the bitcoin network’s processing power, according to the Cambridge Centre for Alternative Finance. Many crypto miners fled China for neighboring Kazakhstan over Beijing’s ban on virtual currency mining.

Kazakhstan’s internet shutdown took as much as 15% of the network offline, according to some estimates.

Bitcoin’s computing power “is not directly correlated to the price of Bitcoin, but it gives an indication of the network’s security, so a fall can spook investors in the short term,” Marcus Sotiriou, analyst at U.K.-based digital asset broker GlobalBlock, said in a note Thursday.

– CNBC’s Mackenzie Sigalos contributed to this report

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