The crash of the crypto exchange FTX has sparked alarm across the digital asset industry. Many are referring to the meltdown as crypto's "Lehman moment", comparing it with the downfall of the investment bank in 2008.
The FTX crash had an immediate impact on the market. Investors began withdrawing funds en masse, causing a significant drop in valuation for most cryptocurrencies. Since then, many firms exposed to the now-bankrupt exchange have begun halting withdrawals.
However, the crash will also have several long-term effects. It is still being determined how far these repercussions will spread and how long the industry will take to recover from an event of this magnitude. So, let us look at five such long-term effects and what they mean to the crypto industry.
Slower crypto adoption
The meltdown of FTX has left everyone in a bit of shock. Many crypto investors viewed FTX as a gold standard when it came to digital asset management. Therefore, the fact that it has imploded so spectacularly and quickly has put a huge dent in the confidence of existing investors.
That's not all; this is the second major crypto firm to crash this year, with the wounds from the Terra-Luna meltdown yet to heal. Moreover, cryptocurrencies have had an astounding downfall through the current crypto winter. Most tokens are trading 60 or 70 percent below their all-time highs.
Altogether, these factors reinforce the volatile image of the crypto market, making it a scary proposition for newcomers and possibly slowing crypto adoption in the future.
Crypto venture capital could take a hit
The FTX meltdown could also have a significant effect on crypto venture capital. Funding had already begun to slow, thanks to the current crypto winter, and the crash of FTX will only add to the troubles.
According to a report by PitchBook, a VC and private equity database, crypto funding saw a 37 percent decline in Q3 of 2022 compared to the same period last year. This downward trend could be amplified by the FTX meltdown, on the back of which VC giant Sequoia Capital, marked down its investment in the beleaguered exchange to $0. When you add the current crypto winter to the mix, you can see why VCs will think twice before injecting money into the digital asset sector.
Increased regulation and oversight
Most lawmakers and enforcement agencies worldwide see cryptocurrencies as a grey market that lacks regulatory frameworks. The FTX crash will only strengthen this notion and bring about stricter guidelines in the future.
In an interview with Bloomberg, US Treasury Secretary Janet Yellen voiced her concerns regarding the FTX implosion. She stated that FTX's failure has reinforced her view that the digital asset industry needs "very careful regulation," emphasizing that the crash "shows the weaknesses of this entire sector."
However, added regulation could be a good thing. It will ensure exchanges and other crypto firms adhere to certain standards and work to ensure the safety of investor funds. This is missing in the current setup and it is the reason why firms unexpectedly crash to nothing, leaving investors holding the bag. Good regulations could provide a safeguard from such events in the future.
Prolonged crypto winter
The crypto market has been going through a rough spot for the past few months. Amid such a strained economy, the crash of the 4th largest crypto exchange in a matter of hours is bound to spook investors.
This notion is backed by the fact that exchange outflows have touched record highs in the last few days. Investors are putting their coins into cold storage and waiting for the effects of the FTX to crash to blow over. This could have a negative impact on cryptocurrencies and prolong the bear market indefinitely.
Additional layoffs in the crypto industry
The current bear run has been extremely hard on crypto firms. Several exchanges, DeFi protocols and dApps have been forced to lay off employees in large numbers to reduce overhead costs. Data aggregator CoinGecko suggests that the crypto space has seen 4,695 employees let go in 2022. This number could increase further, given the FTX crash, the number of firms it has affected, and the prolonged crypto winter it could cause.
Conclusion
There is no doubt that the FTX meltdown will have severe ripple effects throughout the crypto sector. However, how long the market takes to recover from the meltdown, that remains to be seen.