The reversal comes one day after Binance CEO Changpeng Zhao said he had reached a non-binding deal to buy FTX’s non-US businesses for an undisclosed amount.
FTX had been struggling with a surge in withdrawals that caused a “liquidity crunch”.
With Binance backing out of its plans to acquire FTX, citing problems with the company’s finances as well as potential regulatory investigations, the ongoing crypto rout has deepend.
The FTX collapse has wiped out over $180 billion from the crypto market as digital assets across the board are under tremendous selling pressure.
The value of the two leading cryptocurrencies bitcoin and ethereum fell by 28% and 30%, respectively in the last two days. The token for Solana (SOL), a popular competitor to the Ethereum blockchain and in which FTX held a major stake, was one of the biggest losers – falling nearly 50% on Wednesday, and down 93% from its 2021 high. FTX Token or FTT, the native token of FTX, has lost 90% of its value in less than 72 hours.
Venture capital firm Sequoia Capital said it will completely write off its more than $210 million investment in FTX, as the cryptocurrency exchange is at risk of bankruptcy.
While crypto might seem like a niche corner of finance, the saga between two of its top players has upended the crypto ecosystem and is likely to have far-reaching repercussions. According to New York Times, it is already being referred to as the industry’s “Lehman moment” — a reference to the 2008 collapse of Lehman Brothers, which set off a global financial panic and made it clear to laypeople just how much trouble Wall Street was in.
What are Binance and FTX?
They’re two of the biggest crypto exchanges, which are marketplaces where investors buy, sell and store tokens. Binance is the biggest crypto exchange by volume by a long way — and FTX is in the top five.
“Binance’s operations are somewhat murky — it has no official headquarters, and it has tangled with authorities and regulators in many countries where it operates — but it has been extremely successful, and currently controls roughly half of the cryptocurrency exchange market. FTX, which has its headquarters in the Bahamas, is run by Sam Bankman-Fried, a 30-year-old American billionaire and major Democratic donor. It had a valuation of $32 billion as of its last fundraising round.
FTX is also better-known than Binance in the United States, partly because it has spent millions of dollars on Super Bowl ads, naming rights for sports stadiums (the Miami Heat play at FTX Arena) and throwing fancy conferences where celebrities such as Bill Clinton and Tom Brady show up,” reported the New York Times.
FTX is also regarded (or was, until this week) as one of crypto’s “blue chip” companies — the kind of stable, well-capitalized businesses that survived even when the rest of the crypto market was in free fall. In fact, it spent much of this year bailing out other crypto firms, and was generally regarded by investors as a responsible, grown-up firm that didn’t engage in risky, speculative trading or gamble with customers’ funds.
Who runs them?
They’ve also been led by two of the most visible and charismatic people in the crypto world: Binance by Changpeng Zhao (or CZ, as he is known), and FTX by Sam Bankman-Fried (or SBF).
Formerly a trader at Jane Street, until just a few weeks ago the curly-haired 30-year-old was everywhere in the crypto industry — backing flailing projects including BlockFi, Voyager Digital and Celsius. He counted the likes of Softbank Vision Fund, Singapore wealth fund Temasek and Ontario Teachers’ Pension Plan as investors.
According to Bloomberg’s billionaire index, the FTX blowup torpedoed SBF’s net worth by 94%, from $16 billion to below $1 billion.
Zhao is a China-born Canadian citizen who emigrated to Vancouver aged 12 and graduated with a degree in computer science from McGill University in Montreal. He started Binance in 2017 in Shanghai — but the Chinese government banned crypto exchanges the same year. He’s now based in Dubai.
FTX’s founder Sam Bankman-Fried and Binance’s chief executive Changpeng “CZ” Zhao are two of the most powerful people in the cryptocurrency market and high-profile rivals.
Why did they fall out?
Back in 2019, Binance invested in FTX, then a derivatives exchange. The next year, Binance launched its own crypto derivatives, quickly becoming the leader in the field.
Tensions rose as the two companies increasingly took divergent tacks with regulators. Bankman-Fried was testifying in the US Congress, while Binance was said to be facing regulatory probes around the world.
The two companies have also been competing for assets, with both bidding for assets of Voyager Digital. FTX.US, the American affiliate of FTX, won the auction.
Zhao and Bankman-Fried have been trading barbs on Twitter for months, feuding over issues ranging from lobbying US politicians to allegations of frontrunning trades.
So what just happened in the crypto world?
Over the weekend Zhao tweeted that Binance would be liquidating its holdings of a token known as FTT, which is issued by FTX.
The tweet followed a story from crypto news outlet CoinDesk saying that Alameda Research, a trading house owned by FTX’s founder Bankman-Fried, had a lot of its assets in FTT token.
That fueled broader concerns about FTX’s health and investors began to withdraw money. The FTT token plunged. A day before reaching a deal, Bankman-Fried said on Twitter that assets on FTX were “fine” and that “a competitor is trying to go after us with false rumors.”
On Tuesday, CZ announced a potential takeover of FTX, with due diligence to be conducted “in the coming days.”
Then late Wednesday afternoon New York time, Binance said it was pulling out of the deal saying its rival’s issues were “beyond our control or ability to help.” Binance executives had discovered a gap between FTX’s liabilities and assets that may amount to more than $6 billion, a person familiar with the matter told Bloomberg.
US regulators are investigating whether FTX properly handled customer funds, as well as its relationship with other parts of Bankman-Fried’s crypto empire, including his trading house Alameda Research.
What does this mean for the markets?
It’s injected a lot of uncertainty for investors who are worried about the potential for spreading contagion given the pivotal role FTX and its co-founder Sam Bankman-Fried played in the industry.
FTT, the utility token of the FTX exchange, collapsed by more than 40% Wednesday following a tumble of more than 70% Tuesday. But just about every digital coin is struggling.
Bitcoin fell as much as 15% to $15,987 on Wednesday, the least since November 2020, which leaves a lot of holders under water.
What does this mean for FTX users?
That’s unclear. Clients worried about the future of the exchange have already pulled out $430 million worth of Bitcoin in the space of just four days.
How does this affect CZ and SBF?
It’s a huge comedown for SBF, who had previously been seen as one of the most accomplished people in the industry.
That’s playing out in fortunes, as well. Bankman-Fried’s 53% stake in FTX was worth about $6.2 billion before Tuesday’s takeover, according to the Bloomberg Billionaires Index, based on that fundraising round and the subsequent performance of publicly traded crypto companies. His crypto trading house, Alameda Research, contributed $7.4 billion to his personal fortune.
The Bloomberg wealth index assumes existing FTX investors, including Bankman-Fried, will be completely wiped out by Binance’s bailout, and that the root of the exchange’s problems stemmed from Alameda. As a result, both FTX and Alameda are given a $1 value. That leaves SBF’s net worth at about $1 billion, down from $15.6 billion heading into Tuesday. The 94% loss is the biggest one-day collapse ever among billionaires tracked by Bloomberg.
Even after pulling out of the deal, Bankman-Fried’s fall from grace leaves CZ as the top person in the crypto world. He’s had a rough period too, with his fortune down 84% year-to-date, according to the Billionaires Index — but he’s still estimated to be worth $14.9 billion.
What does this mean in terms of regulation?
This episode and how quickly it unfolded provide a stark example for regulators who have been concerned about the lack of guardrails in the freewheeling crypto space. Jurisdictions that have been considering looser rules may be less likely to do so — especially on the back a few months ago of implosions in the Terra/Luna ecosystem and hedge fund Three Arrows Capital.
Bankman-Fried told FTX.com investors on Wednesday that the company needs a cash injection, or else it would need to file for bankruptcy.
Whether FTX survives this crisis or not, the entire industry is on edge about the risks of contagion.
Also, what will happen to FTX’s customers and their money?
Unlike deposits in a traditional bank account, deposits on crypto exchanges aren’t insured by the government, and there are questions about whether FTX has enough assets to make its remaining customers whole, reported the New York Times.
” If the company files for bankruptcy protection, as the crypto firms Voyager Digital and Celsius Network did this year, investors could be left to fight for their money — or what remains of it — through the courts,” it said.
Is crypto’s regulatory future in jeopardy?
” FTX, after all, was one of only a handful of U.S. crypto firms that had invested heavily in lobbying, and Bankman-Fried was seen as a “white knight” who stood the best chance of persuading skeptical lawmakers of crypto’s value. Now, it appears that those efforts have stalled, at best — and that regulators who want to portray crypto as an out-of-control Wild West will have one more example to point to.”
Will FTX’s collapse set off a broader market failure, as the collapse of Lehman Brothers did in 2008?
Already, the news has rippled out into the rest of the crypto market. Bitcoin and Ether prices both fell Tuesday, and the price of Solana (a cryptocurrency that FTX has supported) fell about 20%. Shares in publicly traded crypto companies, such as Coinbase, were down as well. FTX’s investors, which included Sequoia Capital, Lightspeed Venture Partners and SoftBank, will most likely lose most or all of their investments. And given how interwoven FTX was with the rest of the crypto economy, it may be a while before we know the full extent of the damage.
The hope, of course, is that in contrast to 2008, when Wall Street’s collapse cascaded into a global financial crisis that led to millions of Americans losing their jobs and homes, the fallout from FTX’s collapse will stay mostly contained to the crypto industry. But it’s still too early to tell.
Is the worst over for the crypto rout?
The worst might not be over yet. “Binance refusing to bailout FTX means they effectively have a massive hole in their balance sheet. Now the market has to deal with this new unknown; what is the size of the hole that SBF and FTX have dug themselves into,” said Rajagopal Menon, Vice President, WazirX.
This is also a worrying development for the industry already in the middle of a bear market. “The general feeling was that we had hit bottom, and the only way was up. Things could get a lot worse in terms of volatility before they get better. In the long run, there will be a push for more transparency in the form of proof of reserves,” added Menon.
Will this impact Indian investors?
FTT crash can start a snowball effect in liquidations as the lenders to FTX could also go down.
“A lot of retail investors might go inactive for a while due to the current volatility in the market, on the other hand, institutional investors might like to capitalize on discounted assets at the moment and hedge their investments,” said Amanjot Malhotra, Country Head – India, Bitay. He thinks retail investors might like to convert their ALts into Bitcoin, Ethereum, and other stablecoins and put them in a cold wallet till the market stabilizes.
The market wide volatility could have been avoided
A takeaway from the episode: Irresponsible risks can be costly.
“Do not use customer assets to borrow money or deposit it elsewhere to earn interest without their knowledge and consent. When all goes smoothly, this may look smart and can help you grow fast. But when things hit a rough patch, and customers suddenly rush to sell their assets and take cash out, you may find yourself in a tight spot. As recent events have shown, when things go down, there are spillover effects in the wider market. The intense selling pressure that we are seeing on Solana is a case in point. This market-wide volatility could have been avoided had the exchange and trading firm involved done their fiduciary duties responsibly,” said Ashish Singhal, co-founder of CoinSwitchKuber, one of India’s largest crypto investing platforms.
With inputs from New York Times, Bloomberg and Reuters