Is FTX Liquidation as Terrifying as It Sounds

On September 13, 2023, FTX was granted permission from the U.S. Bankruptcy Court to liquidate its crypto holdings. The income obtained from this liquidation will be used to repay FTX's debtors.

According to the court document, the proposed liquidation plan involves approximately $3.4 billion in crypto assets, including SOL, BTC, ETH, etc. The maximum weekly limit for liquidation is $100 million, which can be increased to $200 million with the committee's approval. Galaxy Digital Capital Management has been appointed as the advisor responsible for overseeing the sale of crypto assets. The primary goal of liquidation is to use the proceeds to repay the debtors while minimizing the risk of price fluctuations.

So, what is the composition of FTX's liquidated assets? When will the liquidation begin? And what impact will it have on the market? Let's answer these questions one by one.

TL;DR

• The largest asset in FTX's liquidation is SOL, valued at approximately $1.16 billion, accounting for nearly 35% of the total. It is followed by BTC worth $560 million and ETH worth $190 million.
• With the help of the sales limit imposed by FTX's weekly liquidation plan and the assets' circulating status, the market prices of these assets are unlikely to experience significant fluctuations as a result of this liquidation.
• The formal commencement of FTX's liquidation is earliest in the second quarter of 2024, which is still a considerable amount of time away from the current date.

FTX Liquidation Assets Composition

FTX's debtor assets primarily consist of four components: government-recovered assets, brokerage assets, crypto assets, and cash-relevant assets.

Among these, the largest proportion of assets is held by crypto assets, accounting for nearly half of FTX's total debtor assets. This is the portion of assets that will be liquidated.

The total value of the crypto assets being liquidated is $3.4 billion. These assets fall under Category A, which indicates high-security mainstream crypto assets. Among them, the largest proportion is represented by Solana's native token, SOL, accounting for nearly 35% of the total liquidation assets, with a value of approximately $1.16 billion. The second and third-ranking assets are BTC and ETH, with values of $560 million and $190 million, respectively. The specific information for the remaining assets in the top ten is as follows:

Price Fluctuation Analysis

SOL

As the largest asset in FTX liquidation, the sale of SOL has undoubtedly attracted the most attention.

According to TokenInsight's data, after the news of FTX's liquidation was released on September 10th, the price of SOL rapidly dropped by 6 points. The possibility of significant selling pressure resulting from the large sale of SOL has had a notable impact on its price. Most investors also hold a pessimistic sentiment about the upcoming liquidation, believing that the price of SOL may experience a significant decline due to the substantial sell-off.

SOL being liquidated in this process accounts for approximately 16% of the total circulating supply of SOL. From most investors' point of view, they possibly believed that such a large amount of assets being sold could naturally cause significant market turbulence, potentially leading to a price drop (if sold all at once, the price of SOL is estimated to drop by 13%, from $18.7 to $16.25). But is this really the case?

Upon our further analysis, it's suggested that the impact of FTX's liquidation on the price of SOL might not be as significant as investors thought. In other words, FTX liquidation may not affect the price of SOL at all. There are two key reasons for this:

• Liquidation Plan can reduce Price Fluctuation

To reduce the risk of market price volatility, FTX's proposed liquidation plan involves a weekly frequency with a set upper limit. The plan dictates that the value of assets released to the market in a single sale cannot exceed $100 million (with a potential maximum of $200 million). Additionally, these sold assets are likely to be composed of various tokens, meaning that each weekly liquidation may consist of a mix of different tokens. For example, a single sale might include 40% SOL, 30% BTC, 20% ETH, and 10% APT. Therefore, the weekly sale of SOL is well within the market's capacity and is not expected to have a significant impact on its price.

• Most SOL is Still Locked

Although, according to court documents, the value of SOL in FTX's liquidation assets is approximately $1.16 billion, the actual amount of SOL available for liquidation is not as substantial. Currently, the circulating SOL held by FTX is worth only $360 million, accounting for about 30% of the SOL liquidation assets. Approximately 70% of SOL is still in a locked state.

According to data from solanacompass.com, the number of SOL currently held by FTX in a locked state is 42,248,610. Based on the current SOL price (as of September 18, 2023, $18.7), this amounts to approximately $800 million. The specific quantities and lock-up periods are detailed in the chart below:

As indicated in the chart, more than 7.5 million SOL will remain locked until 2025, while the majority of the remaining SOL is subject to linear monthly unlocks extending as far as 2028. Therefore, the actual amount of SOL available for liquidation is significantly less than initially announced. Considering SOL's market capitalization of over 70 billion dollars, the weekly sale of SOL is far from sufficient to cause significant market price fluctuations.

BTC

According to TokenInsight's data, the current weekly average trading volume for BTC is approximately $600-800 billion, with a daily average trading volume of around $50-100 billion. In contrast, the total liquidation value of BTC in FTX liquidation is only $560 million.

Under the FTX liquidation plan as proposed, if only BTC is liquidated each week, the maximum value of BTC that can be sold in a single sale is $200 million. Considering that the current market capitalization of BTC is close to $522.5 billion, the sale of $200 million worth of BTC would have a negligible impact on its price, amounting to less than 0.01%. The impact can be totally disregarded.

ETH

According to TokenInsight's data, the current weekly average trading volume for ETH is approximately $250-300 billion, with a daily average trading volume of around $30-50 billion. In contrast, the total liquidation value of ETH in FTX liquidation is $190 million.

Similarly, according to the FTX liquidation plan as proposed, if only ETH is liquidated in a single week, it would take at most one week to sell all of the ETH allocated for liquidation. Considering that the current market capitalization of ETH is close to $197 billion, the impact of selling $190 million worth of ETH in one go would be a maximum of approximately 0.05% on its price.

Other Assets

For assets with smaller market capitalizations like APT and STG, it is highly likely that FTX will choose to liquidate them in a distributed manner to help reduce the potential price volatility caused by significant selling pressure.

As an example, let's consider APT with a total liquidation value of $137 million. If it were distributed over 34 weeks (total liquidation asset value: $3.4 billion, weekly limit of $100 million, completing the liquidation in 34 weeks), the impact on APT's price would decrease from nearly 10% to approximately 0.3%.

When does Liquidation Begin?

According to the court document, the earliest start date for FTX's liquidation is in 2024 Q2.

After the court's approval of FTX's liquidation on September 13th, FTX will enter the phase of the liquidation plan solicitation. The specific arrangements are as follows:

One crucial milestone to note is the specific timeframe for finalizing the liquidation plan. This could occur as early as 2024 Q2. Before this, FTX will gather input and engage in discussions with creditors to reach a consensus on the weekly liquidation plan.

Given that the asset sales frequency during liquidation is clearly defined as once per week, the liquidation plan will need to specify details such as the types of assets to be sold each week, the sale amounts, and their proportions.

Based on the information provided by FTX earlier, if the weekly asset sales value during liquidation falls within the range of $100 million to $200 million, the maximum liquidation duration would be 34 weeks. This translates to approximately 6-8 months to complete the entire liquidation process. Therefore, if FTX begins liquidation in 2024 Q2, it could conclude as early as the end of the next year or take as long as extending into 2025.