FTX Crisis: Time to sell crypto stocks?

The sudden collapse of FTX caused a dip in crypto and brought increased regulatory scrutiny. Has crypto run its course?

Externalities are increasing

One of the main selling points of crypto from its inception is decentralisation. But the recent string of issues surrounding crypto derivatives has raised questions about the longevity of the asset. Governments have been very keen to intervene in this market, and the latest event could be the catalyst that would undermine one of the key selling points of the technology.

The issue at the core is still the overvaluation of tech and isn't all that different from tech stocks rising to astronomic heights to crash in 2001. At that time, also, calls were made to regulate tech stock trading. People were trying to get in on the next big thing, pushing valuations too high. Sure, the situation attracted scammers; but the bottom line is that crypto is being sold on its potential value, not its intrinsic value, just like many dot-com stocks. Many of those companies are still around today; many more went bust. Picking those that have staying power is the key for traders.

Coming down to Earth

It's well known that the loose monetary policy and stimulus checks during the pandemic helped fuel the crypto bubble. Naturally, as central banks tightened, tech, in general, started losing value, and the most cutting edge of the tech - crypto - was at the forefront of the losses. The pressure on crypto companies is to "shake out" the weaker ones and find those with staying power. That is, bring the valuations back to reality.

FTX was a natural result of drying up liquidity and exposing over-leveraged companies. As the Fed keeps tightening, more are likely to follow, if perhaps not as dramatically. At some point, inflation will stabilise, growth will return, and rates will settle down. Then crypto can bounce back.

Silvergate Capital: the defence stock in crypto?

Silvergate Capital is down 89% year-on-year, with the recent short-term decline owed to a recent announcement that FalconX would distance itself from the company. That, despite reporting an upbeat mid-quarter update. However, Silvergate Capital has a forward P/E of 5.4 and little exposure to FTX, though a small market cap. Interestingly, it is also regulated, akin to a defence stock for crypto, as the firm will likely remain liquid enough even if the crypto space lights out.