Last Wednesday, September 13, 2023, the judge overseeing FTX’s bankruptcy proceedings, gave permission to the firm to liquidate its remaining crypto assets.
While some observers were spooked by the prospect of $3.4 billion in cryptocurrencies flooding the market, Coinbase recently outlined four reasons the FTX liquidation is unlikely to have any notable effect on cryptocurrency prices.
In the run-up to Wednesday’s court ruling, the prices of major cryptocurrencies dipped, with one of the biggest losers, Solana (SOL), falling by as much as 10% between Saturday 9 and Monday 11.
Despite fears over the fate of the $1.16B SOL held by FTX, by Thursday, September 14, SOL had clawed back its losses from the weekend. At the time of writing, Solana was in the green again, having increased in value by 10.96% over the past week.
Solana’s rally mirrors a wider market rebound that coincided with the FTX liquidation news. As of Monday, September 18, all of the top ten market cap cryptocurrencies had appreciated in value over the course of the preceding week.
In a weekly commentary on Thursday, September 14, Coinbase summarized the market sentiment surrounding the Solana and the FTX liquidation.
“After some selling pressure early this week, markets later recovered, the post noted. This recovery, “implicitly [recognizes] that there are several mitigating factors that should reduce the risk of market shocks when these tokens are eventually sold, it added.
Specifically, Coinbase identified 4 reasons that the recently unlocked FTX assets aren’t likely to disturb normal market activity
As the Coinbase note pointed out, FTX’s liquidation plan should prevent the firm disrupting markets by from dumping large quantities of tokens at any one time.
FTX can only sell $50M worth of cryptocurrency during the first week of liquidations across all its assets. In the coming weeks, sales can’t exceed $100M.
As well as helping to maintain market stability, sell limits ultimately protect FTX from the risk of its own selling pressure negatively affecting cryptocurrency prices, thus reducing the value it is able to recoup for creditors.
Another restriction placed on FTX liquidators comes in the form of a 10-day notice period for sales of Bitcoin, Ether and “insider affiliated” tokens.
While these sales won’t contribute to FTX’s weekly liquidation limits, they will require approval from insolvency committees and appointment of a trustee by the United States Department of Justice.
Sales will be conducted through Galaxy, which is acting as FTX’s investment adviser.
As an early Solana investor, FTX received a large allocation of vested SOL, accounting for around 15% of the token’s total supply.
However, although SOL makes up the largest chunk of FTXs crypto assets, the majority of its token holdings remain locked until at least 2025.
An FTX-owned wallet currently contains 26,740,743 staked SOL, with plans for unlocking between 2025 and 2028.
In the meantime, FTX will be able to auction off the wallet keys, but not liquidate the tokens themselves.
Finally, FTX will be able to ask for approval to hedge its sales of BTC and ETH.
The prospect of staking and other hedging arrangements gives the FTX liquidators an incentive to hold onto assets for longer in order to grow their value.
As stated in the court application to liquidate assets, “Hedging of Bitcoin and Ether—two digital assets for which there is a liquid hedging market—will provide a means to lessen the Debtors’ exposure to adverse price movements.”
“The Debtors will stake certain of their Digital Assets in order to generate passive yield,” the application adds.