Original link: "Crypto Liquidity in a Post-Alameda World》

Original compilation: Qianwen, ChainCatcher

Original compilation: Qianwen, ChainCatcher

Various anecdotes and rumors about FTX emerge in an endless stream. On Friday, FTX, FTX US and 134 related entities all filed for bankruptcy, a sign of how deep the exchange and related companies have been. Just hours later, the exchange suffered a massive hack in which more than $600 million was siphoned from the wallets of FTX and FTX US, prompting rumors of an insider operation.

Perhaps most egregiously, a Reuters report claimed that SBF had built a secret backdoor to funnel funds between Alameda Research and FTX without auditors noticing.

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Alameda Gap

Alameda Research is one of the largest market makers in the cryptocurrency space, providing billions of dollars worth of liquidity for high and low market cap tokens. It is now slowly emerging that their entire trading operation was conducted by FTX improperly mixing client funds. Last Thursday, Alameda Research announced that they were officially closing the deal. What does this mean for liquidity across the market?

Cryptocurrency liquidity is dominated by just a handful of trading firms, including Wintermute, Amber Group, B2C2, Genesis, Cumberland, and (now defunct) Alameda. With one of the largest market makers gone, we can expect a significant drop in liquidity, which we call the "Alameda Gap". Other market makers will also suffer more losses due to the collapse of FTX, which will continue to widen the gap. So far, Amber Group, Wintermute, and Genesis have all announced that they have funds on FTX, which could affect their overall market-making operations.

Liquidity normally dips during times of volatility as market makers draw bid/ask assignments from order books to manage risk and avoid bad liquidity. But what we have observed over the past week is that liquidity has fallen more sharply than in any previous market decline, suggesting that the "Alameda liquidity gap" is likely to persist, at least in the short term.

Since November 5, CoinDesk released a survey on Alameda’s assets, and the liquidity of BTC within 2% of the median price has dropped from 11.8k BTC to 7k, the lowest level since early June.

The chart above aggregates market depth across 18 exchanges, including FTX, which no longer has any real market-making activity. Even excluding FTX from the chart, there is still a huge dip in depth, suggesting that liquidity across the market was severely impacted by Alameda's debacle and other market maker losses. Since Nov. 5, Kraken’s BTC depth is down 57%, Bitstamp’s is down 32%, Binance’s is down 25%, and Coinbase’s is down 18%.

The ETH market was also affected by the collapse, with a 2% market depth down to levels seen in late May.

Fortunately, BTC and ETH liquidity across the market has been steadily increasing since the crypto credit crisis in May and June, so a deep drop should not be too disruptive. Even more worrisome is the liquidity of altcoins. Alameda has invested in dozens of projects, holding millions of dollars worth of illiquid tokens. But since Alameda is also a market maker, we can assume that they are also the main liquidity provider for these tokens.

The full breakdown of Alameda’s holdings with FTX’s tokens is unclear, but below is a breakdown of FTX’s balance sheet provided by the Financial Times, which ranks holdings by liquidity.

Under the "less liquid" ("less liquid" in the table) category, the top four are FTT (where it all started today), a Solana DEX token called Serum (SRM), Solana's native token SOL, and a token called MAPS.

Let's look at the liquidity situation of SRM, SOL and MAPS before and after Alameda. The figure below is the in-depth summary of the 9 exchanges that provide SOL trading pairs. The overall market depth has dropped by 50%, from 1 million SOL to under 500,000 across all order books, and this drop has occurred on every exchange.

SRM and MAPS also saw deep and huge declines. To avoid price impact, we express depth in native units per token, which indicates that market-making activity has been severely impacted by the Alameda crash.

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Are Stablecoins Risky?

While illiquid altcoins make up a large portion of Alameda/FTX's balance sheet, Alameda also holds millions of stablecoins. Below is a Dune Analytics dashboard made by 21 Shares that tracks the holdings of known Ethereum wallet addresses associated with Alameda.

As of Monday morning, Alameda held more than $46 million worth of stablecoins, with its largest stablecoin holding being TrueUSD (the sixth-largest stablecoin by market capitalization), followed by USDC at $11.7 million and USDC at $11 million. USDT. Since the end of last week, its USDC holdings have dropped fivefold.

Although TUSD is one of the least liquid stablecoins with active trading on only 10 centralized exchanges, its price on centralized exchanges has remained relatively stable over the past week.

USDT showed the most dramatic price swings, falling to $0.989 on November 10 before surging to $1.058 on November 11. Since then, it has been trading at a small discount, suggesting continued selling pressure in the centralized spot market.

There has even been speculation that Alameda is actively shorting USDT, using USDC to borrow USDT on Aave and then selling it on other exchanges such as Curve. The activity on Curve 3pool below shows a large amount of USDT being sold in exchange for USDC and DAI, causing the price of USDT (in blue) to drop briefly below its peg price by 2 cents. The price has since recovered and is now only 10 basis points below its peg.

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Extreme Volatility in Derivatives Markets

Last week was undoubtedly the most volatile in cryptocurrency history, with both BTC and ETH seeing their biggest one-day losses in more than five months after Binance pulled out of its acquisition of FTX on Nov. 9. Spot prices fluctuated wildly, resulting in $875 million in cascading long liquidations in just 24 hours, and perpetual futures open interest plummeted by double digits.

BTC open interest across 5 exchanges (excluding FTX) fell from around $8 billion to $5.5 billion during the week, while ETH fell from $4 billion to $3 billion. The collapse of FTX could have a major impact on the derivatives market, which accounted for 14% of total BTC open interest and 28% of ETH’s open interest as of early November.

The events of last week had a major impact on market sentiment. Funding rates for both BTC and ETH have plunged into negative territory and remain in the red as of Monday morning as the market has clearly turned bearish.

The options market also saw a sudden shift in sentiment, with BTC and ETH options seeing a spike in implied volatility on Nov. 8-9. Implied volatility measures an options trader's expectations of future price movements.

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After last week’s Token Inflation print, the cryptocurrency market is sure to experience a sharp rally sometime in the coming week, which may give hope that inflation may peak and the Federal Reserve will slow down its monetary tightening policy. While crypto assets tumbled, the Nasdaq 100 and S&P 500 jumped 8.8% and 5.9%, respectively. As a result, the rolling 30-day correlation between BTC and U.S. stocks fell to just 0.17, the lowest level since November 2021, before recovering to 0.4.

After a rally over the past few months, BTC’s correlation with gold turned negative, closing the week close to zero. In contrast, its correlation with ETH surged to its highest level in more than a year.

The turmoil in the cryptocurrency market has led to sharp losses in cryptocurrency-related stocks, which have significantly underperformed the broader market amid falling confidence in the industry and contagion concerns.

The value of Microstrategy's 130,000 BTC holdings plummeted by around $500 million in five days, with its shares seeing the biggest drop, ending the week down 37%. Grayscale Bitcoin Trust (GBTC), the largest BTC investment vehicle, lost 28% of its value. This movement further led to an increase in the Grayscale discount, reaching an all-time low of over 41%. The discount is the difference between the GBTC share price and the market price of the Bitcoin it holds. This figure has been expanding since February 2021 due to structural reasons and increased competition. Rumors of Alameda Research holding a large GBTC position likely added to the selling pressure.

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diffusion

The impact of the FTX incident has only just begun. Over the weekend, Blockfi announced that they had been bailed out by FTX during the crypto credit crisis and would be forced to halt withdrawals. Hedge fund Galois Capital admitted that half of its funds are kept on FTX. Investors in FTX, including SoftBank and Sequoia, have since written down their investments to zero. It will be several months before we fully understand the extent of the crash.

But cryptocurrencies have their peculiarities, and in the aftermath of the FTT debacle a whole new exchange token emerged. Last Friday, Bitmex launched their native BMEX token, which they named “the token for true believers.” The usage of this token is strikingly similar to that of FTT.

Since its launch, BMEX has soared more than 100%.