Five Questions Organizations Should Ask While Navigating the Crypto Fallout
Our restructuring and financial services teams outline how to position organizations for what comes next during the crypto winter.
Last week’s stunning downfall of the FTX exchange and the bankruptcy filing of its roughly 130 affiliated companies deepened and lengthened the crypto winter. In the absence of large liquidity and capital shock absorbers at FTX, an unprecedented shock wave has wiped out approximately $150 billion in crypto market cap and comes at a time of institutional weakness and huge retail losses. A domino effect from the bankruptcy filings – as yet unknown in size and nature –?is anticipated, as is the potential reaction of policymakers and regulators. That said, however, FTX’s collapse has resonated in one area for certain: the call for robust regulation to protect investors.
While equity investors to FTX have begun to write off the entire value of their investments, creditors and claimants are interested in the severity of their losses and will begin to frame questions including:
The answers to these questions depend on a number of factors – most importantly, a detailed breakdown of assets, liabilities, collateral posted, and derivative positions of FTX as well as the unknown market conditions throughout the execution of the resolution and liquidation program. As a part of this wave, there could be new bankruptcy filings of other firms, which will complicate the picture with the abundance of distressed assets. We believe a detailed balance sheet and waterfall analysis under multiple market scenarios is needed for companies, creditors, and even regulators to develop strategies for a number of plausible scenarios.
New investors will be watching the bankruptcy proceedings closely and will need to assess the short-term and long-term risk/return trade-offs of potential investment opportunities. As long as they have the risk appetite to invest into crypto-assets or buy equity positions of FTX’s investments in other firms, the two key questions will be i) at what level of valuation will these assets be attractive?, and ii) where is regulation heading in this space??
Business assets and FTX's network may be attractive to peer crypto exchanges as well as potential new investors seeking entry into the crypto exchange business. They will need help in assessing these assets, gauging expected customer behavior, and supporting post-merger integration should they acquire the business assets.
As a leader in financial services consulting, with restructuring, digital assets, and private capital capabilities, Oliver Wyman has worked with crypto-native firms, private capital, public policymakers, and traditional finance players on a host of strategic and operational crypto topics, including regulation, due diligence, and restructuring support. For more information, visit our digital assets hub and reach out to our team: Ugur Koyluoglu, Emily Harte , Matt Cohn , Purav Adiecha , Adam Chonich