The Fly

Here’s What You Missed in Crypto This Week

FTX commences bankruptcy proceedings as Coinbase says ‘not in any direct danger’ due to FTX

As bitcoin, ethereum and other cryptocurrencies get increasing attention from investors, Wall Street and its traditional banks continue to adjust to the shift. Catch up on this week’s top stories highlighting the intersection of these old guard and new school areas of finance with this recap compiled by The Fly.

FTX COMMENCES CHAPTER 11 PROCEEDINGS: In Tuesday tweets, Binance CEO Changpeng Zhao said, "This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire and help cover the liquidity crunch. We will be conducting a full DD in the coming days. There is a lot to cover and will take some time. This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time. We expect FTT to be highly volatile in the coming days as things develop."

On Wednesday, The Wall Street Journal’s Paul Kiernan reported that the U.S. Securities and Exchange Commission has expanded its probe into FTX following its implosion this week. The probe, which has been ongoing for months, is centered on the company’s FTX.US business, which lists dozens of digital tokens. Regulators believe some of these assets, as well as the company’s lending product, may constitute securities under U.S. law that should have been registered with the Commission prior to their sale to U.S. investors.

The Wall Street Journal’s Patricia Kowsmann, Caitlin Ostroff and Berber Jin also reported Wednesday that Binance said it would walk away from its initial offer to acquire FTX after a review of the company’s structure and books. The company offered the following statement: "Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help."

FTX US posted the following announcement at the top of its site on Thursday: "trading may be halted on FTX US in a few days. Please close down any positions you want to close down. Withdrawals are and will remain open. We will give updates as we have them."

FTX announced Friday that the commencement of Chapter 11 bankruptcy proceedings and the resignation of CEO Sam Bankman-Fried. The company named John Ray its new CEO.

COINBASE ‘NOT IN ANY DIRECT DANGER’ DUE TO FTX: Coinbase’s (COIN) CFO Alesia Haas stated in a Tuesday post to the company’s blog: "Given how much conversation there has been in the past few days around liquidity struggles, we thought it important to provide clarity around these challenges and reiterate how Coinbase’s business is different. First, from day one Coinbase has sought to be the most secure and compliant crypto exchange. And today, Coinbase and our customers are not in any direct danger of liquidity or credit risk. Regardless of whether the Binance/FTX transaction completes, we have very little exposure to FTX and we have no exposure to its token, FTT. Currently we have $15M worth of deposits on FTX to facilitate business operations and client trades. We have no exposure to Alameda Research, and we have no loans to FTX. Second, as a publicly traded company in the US, we’ve also built our business in a way that allows us to be transparent about our track record, balance sheet strength, and effectively and prudently manage risk for our customers and ourselves.”

On Wednesday, Daiwa analyst Carlton Lai downgraded Coinbase to Neutral from Buy with a price target of $52, down from $82, after Sam Bankman-Fried "shocked the crypto community" by announcing a non-binding agreement with Binance. The "debacle is far from over," said Lai, who said he sees a good chance that the acquisition could fall through or be done at terms that will result in "major losses to many stakeholders and crypto peers." Any uncontrolled collapse of FTX and Bankman-Fried’s hedge fund Alameda Research would create fallout "significantly worse than that of Celsius, 3AC and Voyager Digital during the summer," added the analyst, who believes Coinbase will "suffer from the beta risk of simply being associated with the crypto sector in the near term." Longer-term, however, Lai still views Coinbase as a "major" winner in the centralized exchanges space. Meanwhile on Thursday, Citi analyst Peter Christiansen lowered the firm’s price target on Coinbase to $80 from $105 and kept a Buy rating on the shares. The analyst acknowledged continued crypto volatility but thinks Coinbase stands out for both its available liquidity and ability to attract high-profile institutional customers and partners. Binance’s proposed acquisition of FTX increases the sense of urgency for legislative action, which likely helps to level the playing field, encourages increased institutional adoption, and perhaps establishes legitimacy for trusted players focused on sustainability regardless of the crypto season, Christiansen said. He dropped the price target accounting for current crypto levels.

Additionally on Thursday, The Information’s Aidan Ryan reported Coinbase is laying off staff in its second round of cuts this year. The layoffs affect at least the company’s talent and institutional onboarding teams and the cuts come as the broader crypto industry is reeling from the high-profile struggles of the FTX crypto exchange.

SILVERGATE DOWNGRADE: BofA analyst Brandon Berman downgraded Silvergate Capital (SI) to Neutral from Buy on Wednesday with a price target of $37, down from $72, to reflect his "diminished expectations" for stablecoin to be a contributor to FY24 earnings. He’d previously argued after Q3 earnings that operating results could be nearing a trough, but "We were wrong," Berman said. Binance’s announced acquisition of FTX, which subsequently fell through, "is a black eye on the broader crypto market," the analyst added. Additionally on Thursday, Wells Fargo analyst Jared Shaw lowered the firm’s price target on Silvergate Capital to $25 from $50 and kept an Underweight rating on the shares. The analyst continues to believe these are early days of broader digital asset adoption, but the growth outlook for Silvergate as a pure-play crypto banking solution is significantly limited in the current environment. The company is seeing volume reductions in its Silvergate Exchange Network, which is its genesis for growth and profitability, he contended. While Silvergate is among the most asset-sensitive banks, balance sheet uncertainty from deposit outflows due to depressed crypto currency values more than offset the benefits from higher rates, Shaw added.

DOJ SEIZES BITCOIN PREVIOUSLY WORTH $3.36B: Damian Williams, the United States Attorney for the Southern District of New York, and Tyler Hatcher, the Special Agent in Charge of the Internal Revenue Service, Criminal Investigation, Los Angeles Field Office, announced Monday that James Zhong pled guilty to committing wire fraud in September 2012 when he unlawfully obtained over 50,000 Bitcoin from the Silk Road dark web internet marketplace. Zhong pled guilty on Friday, November 4, 2022, before United States District Judge Paul G. Gardephe. On November 9, 2021, pursuant to a judicially authorized premises search warrant of Zhong’s Gainesville, Georgia, house, law enforcement seized approximately 50,676.17851897 Bitcoin, then valued at over $3.36B. This seizure was then the largest cryptocurrency seizure in the history of the U.S. Department of Justice and today remains the Department’s second largest financial seizure ever. The Government is seeking to forfeit, collectively: approximately 51,680.32473733 Bitcoin; Zhong’s 80% interest in RE&D Investments, LLC, a Memphis-based company with substantial real estate holdings; $661,900 in cash seized from Zhong’s home; and various metals also seized from Zhong’s home.

MICROSTRATEGY PRICE TARGET LOWERED: Jefferies analyst Brent Thill lowered the firm’s price target on MicroStrategy (MSTR) to $140 from $175 on Wednesday and kept an Underperform rating on the shares. MicroStrategy shares were down 36% since Monday’s close in conjunction with bitcoin’s 23% decline, noted Thill, who estimated that the company’s $3.98B bitcoin investment was worth $2.1B, implying a 47%, or $1.9B, loss. MicroStrategy could face near-term liquidity risk, and longer-term solvency risk, if Bitcoin prices keep declining, said Thill. He believes if bitcoin prices drop under $10,000 it "could force management to take action”.

CRYPTO STOCK PLAYS: Cryptocurrency revenues have been pointed to as reasons to be bullish on Advanced Micro Devices (AMD) and Nvidia (NVDA) in select research. Ideanomics (IDEX), Riot Blockchain (RIOT), Overstock (OSTK), Pareteum (TEUM) and SRAX (SRAX) are other stocks that have been touted, or promoted themselves, as a way to play the crypto theme.

PRICE ACTION: As of time of writing, bitcoin dropped roughly 18% this week to $16,964 in U.S. dollars, according to TradeBlock.

Keywords: bitcoin, ethereum, dogecoin, litecoin, crypto, cryptocurrency, cryptocurrencies, token, stocks, blockchain, stablecoin, regulation

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