In more crypto contagion, wrapped Bitcoin loses its 1-to-1 backing following FTX’s collapse
More and more crypto players are being dragged into the mud by Sam Bankman-Fried's bankrupted FTX empire.
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More and more crypto players are being dragged into the mud by Sam Bankman-Fried's bankrupted FTX empire. And today, the spotlight is on wrapped Bitcoin (wBTC). Wrapped Bitcoin is basically an alternative token backed 1:1 by Bitcoin that can be used on different blockchains. It's also ranked as the 23rd largest cryptocurrency by its market value.
During the peak of decentralized finance (DeFi), wBTC started to gain love from investors. Because it's like a modified version of Bitcoin – it has the same value as Bitcoin – it can be used in the rival Ethereum's DeFi ecosystem, too. Plus, it's easier and faster to trade. So, traders and hedge funds often bought discounted wBTC and then redeemed it for the original Bitcoin when the price was higher.
But now, Bitcoin has plunged to US$16,000, and wBTC has traded lower than Bitcoin, meaning it's lost its one-to-one backing. FTX's implosion means regulators are sifting through the rubble and taking a closer look at everything. Because of that, investors are very concerned the token isn't fully backed and that Alameda Research, cofounded by Bankman-Fried, was one of the biggest merchants to issue the Bitcoin offshoot. After the FTX's collapse in November, wBTC experienced its largest monthly coin redemption, with over 28,000 wBTC redeemed back to the original coin.
Key comments:
“Everyone is afraid of everything these days,” said Evgeny Gaevoy, founder and CEO of crypto fund Wintermute.
“The whole point of using a custodian behind wrapped Bitcoin is to prevent the type of failure like FTX,” said Mike Belshe, CEO of BitGo. “Now, I realize there’s a little bit of market slippage on the price because of some concerns, which is probably healthy, but it was small, it’s not a depeg. Actually, BitGo is one of a handful of companies out there that’s trying to add market structure. Customers come to BitGo because we’ve been doing this right, we’ve been putting customers first, we’ve been putting security first.”
“Those who trade cryptocurrencies must be prepared to lose all their value. No amount of regulation can remove this risk,” said Singapore’s Deputy Prime Minister and Finance Minister Lawrence Wong.
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