Citi analyst warns of “serious” contagion risk from FTX’s failure on the crypto-currency ecosystem

A Citi analyst has warned of a serious risk of wider crypto ecosystem contagion following the collapse of crypto exchange FTX, noting that contagion “may last for a significant period of time“. He added that the crypto industry seems to have “no significant lender of last resort.“

Citi analyst warns of wider contagion in the crypto-currency ecosystem.

Citi analyst Joseph Ayoub explained in an interview with CNBC on Friday that the entire crypto-currency market faces contagion risks following the FTX implosion. The troubled crypto-currency exchange filed for Chapter 11 bankruptcy on Friday. Citi analyst warned:

I think there is a serious risk of broader contagion to the ecosystem itself.

However, he added, “Contagion is unlikely to spread to broader financial markets, and this is primarily due to the size of the crypto space, which is only about $830 billion compared to the $43 trillion U.S. equity market.“

Joseph Ayoub also predicted that crypto companies will face new skepticism and trust issues, but he noted that this also means that other companies may move to capture more market share now that one of the biggest players is gone.

“Within crypto-currencies, it is unclear how far and how deep this will“, said the analyst, elaborating:

The contagion may last a while, and with the number of companies involved and the amount of investment involved in FTX, and following Chapter 11, it could take a long time for this to resolve.

Unlike Binance CEO Changpeng Zhao (CZ), the Citi analyst believes the FTX crash differs from the 2008 financial crisis, when the government stepped in with a massive injection of liquidity and bailed out Wall Street. He believes that:

It seems almost ironic now that we used to think that Sam Bankman-Fried and FTX provided some sort of lender of last resort option … and now it seems that there is no meaningful lender of last resort.

Analysts at JPMorgan Chase similarly said last week that fewer players in the crypto space are now in a position to rescue weaker players. “The number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking“, they wrote, predicting that the price of bitcoin could fall to $13,000.

Prior to FTX’s bankruptcy filing, Binance was considering acquiring the rival crypto-currency exchange. However, after conducting due diligence, the company decided to pull out of the deal, citing “reports of mismanaged customer funds and alleged investigations by U.S. agencies.“