Cryptos Rallied After Sam Bankman-Fried’s Arrest. But Why?

Bitcoin and other cryptocurrencies gained ground on Tuesday after a consumer price index report came in worse than predicted. The consumer price index report (CPI), which climbed at a 7.1% annual pace in November, is down from October’s 7.7% increase and below economists’ forecasts for a 7.3% increase. As a result, this data shows prices climbed in November at the slowest 12-month rate since December 2021, helping cryptocurrency boost this time.

Bitcoin’s price increased by 3.4% to $17,734. Ethereum, the second largest cryptocurrency, gained 3.3% to $1,316. Cardano and Polygon, two smaller cryptos or altcoins, both gained. Dogecoin traded almost even for the day, while Shiba Inu raised 2.3% higher.

Stocks jumped after the report, too but lost much of their gains in afternoon trading. The Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.7%, and the Nasdaq Composite gained 1%.

However, the crypto rally may not stay for long as the market digests the arrest of former FTX founder Sam Bankman-Fried in the Bahamas late Monday, who now faces criminal fraud and money-laundering charges in the United States.

The Securities and Exchange Commission accused Bankman-Fried of “orchestrating a plan to defraud equity investors in FTX” on Tuesday. It is a spectacular fall from grace for the former crypto CEO, who was formerly regarded as one of the industry’s most respected and powerful figures.

The failure of a reputable exchange has also raised doubts about others, such as Binance, the world’s largest crypto trading platform. As a result, FTX’s ex-colleagues, Binance leaders, including its founder and CEO, are at risk of criminal charges in the United States, causing consumers to have rushed to quickly withdraw assets from the exchange amid fears that it may face the same fate as FTX.

According to analytics company Nansen, Binance is presently witnessing the largest daily withdrawals since June, with more than $2 billion worth of Ethereum and Ethereum network-hosted tokens being drained off the platform on the last day. In parallel, the value of Bitcoin on the exchange has dropped by more than 35,000 tokens in the previous day, amounting to more than $610 million at current levels, according to data firm Coinglass.

“Withdrawals on the platform indicate the uncertainty and broken trust in the market, as well as a desperation not to get caught up in another FTX incident,” said Oanda’s Erlam. He added that it is what fear does, especially when trust has been significantly destroyed in recent weeks.

Why Are Cryptos Showing Stamina?

However, Bitcoin and other tokens are still showing short-term resilience. Why?

Much of it is likely due to the correlation between cryptos and equities, which are risk-sensitive assets that have become ever more linked this year in the face of a challenging macroeconomic climate of high inflation and rising interest rates. This link has been one of the few factors assisting Bitcoin in recent short-term rises — but it has also been a double-edged sword, causing selloffs. However, many crypto users started to send their own funds to self-hosted wallets or leave the crypto industry, causing extra instability in the sector, which, of course, is an extra minus in today’s economic situation.

“I can’t think of a time when sentiment has been more bearish in the Bitcoin and crypto markets than right now. We’ve experienced an epic deleveraging,” said Al Morris, the founder of Web3 group Koii Network. “When you look at all this Bitcoin getting taken off exchanges and placed into self-hosted wallets, the picture being painted here is one of most of the would-be forced sellers having already sold.”

While this might hint at the bottom of the crypto market and a good time to invest, investors should proceed with caution because crypto continues to confront existential threats, and Wall Street, at the very least, remains skeptical of any Bitcoin price recovery.