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The sudden collapse of FTX, one of the largest and most influential centralized cryptocurrency exchanges in the world, has left a gaping hole in the crypto trading ecosystem.
Trust in centralized systems has been severely shaken, and volumes on exchanges that operate similarly to FTX have since fallen. Spot volumes are down across major centralized exchanges like Binance and Coinbase. Some of this lost volume has likely been swept up by other crypto-swapping options like decentralized exchanges, OTC brokers, and Peer-to-Peer swap facilities. It is, however, likely that some traders and investors have been burned so badly by FTX that they are sitting on the sidelines.
Background: The collapse of FTX
FTX was a Hong-Kong based one-stop-shop cryptocurrency exchange that offered derivatives, fiat-to-crypto, crypto-to-crypto, and OTC solutions for investors and traders. Despite only being founded in 2019, FTX had risen to a position of prominence within the crypto exchange space. It was one of the most used fiat-to-crypto, crypto-to-crypto, and crypto derivatives platforms in the world, owning a significant market share in each of these categories.
The mega exchange, however, unraveled in November after the price of its native token FTT collapsed. As time passed and more information arrived about the depths of FTX’s troubles, it became clear that the emperor had no clothes. The exchange is now insolvent, and its founder and several key staff have been charged with multiple counts of fraud by key US financial regulators.
According to FTX statistics from 2021, the exchange had 1.2 million users on its books. The collapse of FTX left millions of crypto users without an exchange. Where would they go now, and would they even be willing to trade crypto again?
What does the data say?
Source: Brave New Coin Data. BTC/USD and BTC/USDT pairs across selected exchanges
Source: Brave New Coin Data, ETH/USD and ETH/USDT pairs across selected exchanges
Above we have daily volumes of Ethereum (ETH), and Bitcoin (BTC), over the last year. The volumes displayed are specific pairs from trusted exchanges. The observed pairs are BTC/USD, BTC/USDT, ETH/USD, and ETH/USDT from Bitfinex, Bitstamp, Coinbase, Gemini, Kraken, Binance. There is also data from FTX until its closure.
We can observe clearly with the daily data, that FTX was a major contributor to the ETH trading ecosystem and often jostled with Coinbase to be the second most popular platform to trade Ether outside of Binance. After the collapse of FTX, across the board and particularly in the last three months, exchanges like Binance, Coinbase, and Kraken have had a much lower base of volumes than they did prior to the FTX failure.
In the last three months, the price of ETH has risen by 31.3%. This contrasts against the flagging volumes on major centralized exchanges. A general rule of thumb is that rising prices with lower or tepid volume are difficult to trust and the buying pressure may run out of fuel, stalling the rally.
The data from BTC markets is a somewhat different story. As of April 2023, volumes across BTC markets are much lower than they were pre-FTX, however, for a 3-month patch BTC volumes soared, primarily driven by volumes on Binance.
Source: Brave New Coin Data, BTC/USD across selected exchanges
If we just look at exchanges that offer BTC/USD and remove Binance’s dominant BTC/USDT pairs, Bitcoin volumes follow a similar pattern to Ether. A potential factor in why volumes were so high was the zero-fee trading program launched by Binance. To celebrate its fifth anniversary, Binance launched zero-fee trading for 13 Bitcoin spot trading pairs in July 2022.
This included the BTC/USDT pair and immediately after the program began, there was a surge in the popularity of the pair. The popularity of BTC/USDT on Binance only wavered in the immediate aftermath of the FTX collapse and after Binance ended its zero-fee trading program.
With zero-fees over the Binance/USDT volumes on Binance immediately dropped off. The Zero-fee trading program was unsustainable and inflated volume measurements, but clearly helped Binance temporarily gain market share following the collapse of FTX. Daily volumes from Binance BTC/USDT pair are down ~18% from 1 year ago.
__Source: Glassnode__
__Source: Glassnode__
Another clear indicator is that less activity in centralized exchanges has also pulled down exchange balances. This is the total amount of ETH and BTC held across various centralized exchanges' blockchain addresses. As the charts above show, there is a clear and immediate drop following the collapse, this is then followed by ETH and BTC steadily being moved off exchanges in the following months. The trend of these assets moving off exchanges implies that they are moving into personal custody.
Dex’s enjoy newfound relevance
One of the clear winners of the FTX collapse is the decentralized exchange space. Decentralized exchanges (DEXs) are broadly defined as cryptocurrency trading platforms that operate as direct peer-to-peer transactions without a centralized clearing house. DEX’s unique operations are facilitated by Smart Contract blockchains like Ethereum, Avalanche, and Polygon.
Source: Defillama
Above, we observe the total decentralized exchange trading volumes across the decentralized finance space over the last year. There is an immediate spike in volumes after the fall of FTX, however, following this volumes dropped off before starting to rise again from the beginning of 2023. Since then, Dex volumes have continued to remain higher than pre-FTX collapse levels.
Decentralized exchanges are an appealing alternative to centralized exchanges for a number of reasons:
* **Security -** Their inherent lack of counterparty risk. Centralized exchanges take over control of user funds to facilitate trading. Users have to trust them as counterparties. FTX has shown us that exchanges can intermingle customer funds and use them illegally to support separate ventures. It is also a concern that if they do not store funds securely then there is a hacking or rug-pull risk.* **Control -** Users of decentralized exchanges can withdraw their assets at any time without third-party discretion. Decentralized exchanges are non-custodial. * **Privacy -** There is generally no requirement to provide KYC/AML. Decentralized exchanges are not governed by a central authority, making them more resistant to regulatory interference, censorship, or potential shutdowns. They can be made available to users in far more jurisdictions than centralized exchanges.
Source: GMX.io
Source: GMX.io
One of the beneficiaries of the collapse of FTX has been the decentralized exchange GMX. GMX is a notable spot and derivative decentralized cryptocurrency exchange, initially built on Artibtrum One and later deployed on Avalanche.
GMX is a KYC and AML-less platform that offers seamless cryptocurrency and derivative contract swapping from personal crypto wallets. Aside from offering high speeds and low fees because of Arbitrum and Avalanche’s flexible consensus model, GMX also distributes protocol revenues back to holders of the GMX token, offering passive income back to investors in the protocol within GMX functioning as a DAO.
Over-The-Counter
Over-The-Counter (OTC) crypto trading desks refer to a method of trading cryptocurrencies outside of public exchanges, where transactions take place directly between the buyer and seller or through a trusted intermediary.
OTC trading primarily caters to high-net-worth individuals, institutional investors, and other large-scale traders who want to execute sizable transactions without causing significant price fluctuations in the market. They target a different market to exchanges but are starting to become appealing to some larger exchange users because they offer better customer service, price protection against slippage, and more flexible settlement options.
Genesis is a company that launched a U.S. OTC Bitcoin trading desk in 2013. It revealed in a report published by LMAX and Arcane research, that growth in their OTC desk shifted in Q1 2021 when the entrance of companies like Tesla, MicroStrategy, and Square as major Bitcoin buyers led to a wave of interest from corporates which accounted for 25% of the OTC volume in Q1 for Genesis. This is an increase from only 0.5% in Q4 2020.
Nauman Sheikh, the Head of Treasury Management for Blockchain Protocols and Crypto Derivatives Trading at Wave Digital Assets told Brave New Coin that the OTC trading space was caught in the crossfire of the FTX incident. He said, "OTC liquidity is heavily influenced by centralized exchange (CEX) liquidity, particularly in terms of price discovery and risk mitigation.”
“The OTC market has become more fragmented and inefficient as market participants scramble to find alternative "safer" counterparties and trading platforms. Many OTC participants have hunkered down, become more risk-averse, and have retrenched their product and service offerings,” he says.
According to Sheikh the net effect of FTX going down for the OTC space has been “reduced liquidity, wider bid and offer spreads, and greater market impact and slippage on trades."
Conclusion
The collapse of FTX has left an indelible mark on the crypto trading ecosystem, prompting traders and investors to reassess their options and embrace alternatives to centralized exchanges. The aftermath has impacted major centralized exchanges, they have had to rebuild trust and assure the market that they are different from FTX.
Decentralized exchanges, such as GMX, have emerged as an appealing choice for many users seeking security, control, and privacy in their trading experience. While the dust is still settling after the FTX collapse, it is evident that the crypto community has adapted by diversifying its trading options and placing greater emphasis on decentralized platforms. This has helped to create a more resilient ecosystem that is better equipped to withstand potential future disruption.
"The Bitcoin Trading Ecosystem and the Emerging Institutional Infrastructure" report from LMAX Digital and Arcane Research found that the biggest factors that institutional participants consider when selecting a cryptocurrency trading venue are the reliability of technology (uptime), depth of liquidity, and certainty of execution.
In all three of these areas, centralized exchanges are superior to other crypto trading solutions. Centralized exchanges are highly scalable and can grow faster than decentralized or smaller-scale counterparts like OTC desks. For this reason, the big centralized exchanges like Coinbase, Binance, and LMAX will continue to attract users because of their deep liquidity and organizational capabilities to deploy new technology.
FTX has been a wake-up call for other big players in the centralized exchange space. It has also meant stronger regulations against exchanges and individuals running exchanges, particularly in the USA. Going forward, centralized exchanges will need to ensure they have strong financial controls, experienced executive teams, and robust due diligence. "Market participants are increasingly wary of counterparty risk involving OTC desks, exchanges, and custodians,” says Wave’s Nauman Sheikh. “They are demanding additional assurances or collateral to mitigate potential risks.”