FTX has fallen into a liquidity crisis, and Binance’s rival exchange medium now owes an 8-billion-dollar debt to investors, both major and minor. This development is both surprising and expected.
It is surprising because FTX is second only to Binance, and both exchange mediums have rocked the world of cryptocurrencies, moving billions of dollars daily. So, why did FTX crash?
On the other hand, FTX crashing may not have surprised some folks, considering that many other dominant projects in the decentralized finance scene have also plummeted this year. Luna and Terra USD only just crashed a few months ago, on May 9.
Some valid projects have succumbed to the “crypto winter” era, while others have lost a chunk of their all-time high. This phenomenon affected FTX, a major exchange platform, and led its token to drop by more than eighty percent.
Some key players in the collapse of FTX include the company’s very own Sam Bankman-Fried, CEO and owner of FTX. Binance’s founder, Changpeng “CZ” Zhao, also has a role to play in the crash, albeit a passive one.
Bankman-Fried is now a former billionaire with a previous net worth of $26 billion, which crashed to below a billion just after the collapse of FTX.
The company was founded in April 2018, and Binance, another major crypto exchange, had a brief partnership with FTX. The details of the merger’s dissolution are unknown to the public, but there is general knowledge that FTX paid Binance off in BUSD and FTT tokens.
This is one reason the value of FTT crashed on Monday, November 7, 2022. Binance’s holdings in the company, represented by FTT tokens, were to be sold, and the announcement was made on Sunday.
Changpeng “CZ” Zhao announced the day before FTT lost more than eighty percent of its value that Binance would be liquidating FTX tokens the firm had invested in, but he did not explain why.
The FTX coins that would be liquidated resulted from an equity position Binance held in the latter company. Binance walked out of its agreement with FTX in 2021, and the buyout was worth $2.1 billion. The payment was in BUSD and FTT; the former is the stablecoin of Binance, while the latter is FTX’s native cryptocurrency.
On November 5, the Saturday preceding FTT’s move downwards, 17 percent of the tokens in circulation were transferred to a Binance wallet. The CEO of the famous exchange confirmed that the transaction was one of the steps involved in liquidating FTT tokens owned by Zhao’s centralized organization.
This was beyond the rivalry between both parties, who have been labeled frenemies by the media. Selling that amount of FTT tokens was bound to shake the cryptocurrency market where FTX was concerned.
Recent revelations that have come to light are the reason for this, and not any long-term supposed tiff between CZ and SBF. The Alameda Research balance sheets revealed by Allison worked not only against investors, but also against other crypto exchange platforms, including Binance. Hence, CZ found it inexcusable, and took to Twitter to make his stance known to his 7 million plus members.
Information circulating the internet created a scenario where Binance’s CZ was to buy FTX to save the company from bankruptcy. But perhaps the history of the two forms working together has left sour memories for either party, but a conclusion that merged FTX and Binance could not be reached.
Why did FTX crypto crash?
Speculations here and there have something in common, and their effects before FTX crashed may have fueled the flames that led to its plummeting value. Crypto investors buy because of the fear of missing out, or FOMO, as it is known. In other words, trading psychology is one reason FTX crypto crashed.
This fear has the opposite effect when there is bad news about a cryptocurrency. While trying to escape the loss in value of the said token, investors sell, driving the price further and faster down. And investors who refuse to sell when others are selling are on the losing side.
Zhao’s tweet may have been the catalyst for FTT’s crash. It contributed to sellers selling and driving the market down.
Fundamental analysis is one way to predict a cryptocurrency’s chances of survival. Part of this fundamental analysis is paying attention to the news. DeFi enthusiasts have chosen Twitter as a hub for communicating and staying in touch with crypto news.
Binance was selling its FTT tokens, a total of which made up 17 percent of FTT digital coins in circulation.
Tokens globally are experiencing a bearish market that seems to be here forever—the crypto winter. No digital coin is spared, even though bullish periods exist in the bearish era.
This is no fault of Binance or any other centralized trading platform; it’s just how things should be. Nevertheless, crypto projects and firms are taking a nosedive and losing their worth completely, putting them out of the race.
It creates a worse condition for exchange platforms that are not strong enough to withstand the storm. The bearers of the worst of the turbulence are companies that lend or perform other services for the crypto world. Their worth is based on the value and strength of the tokens they work with.
FTX is a ripe example. Before the crypto winter, the firm was worth 32 billion dollars, but in less than six months, it dipped to $1 billion.
Five hundred twenty-nine million dollars was leaving the FTX volume at a go, which was bound to affect the market cap.
Focus on Binance acting as savior to FTX? But why was FTX on the brink of collapse, and why did it need to be rescued?
This is where another key player enters the scene, further unraveling the plot. Caroline Ellison, the CEO of Alameda Research, a trading platform SBF or Sam Bankman-Fried also founded, offered to buy all of Zhao’s tokens for $22.
It made sense for FTX to buy the tokens at a fair value from a massive seller, but why was Ellison reaching out? Did she have something to gain or lose, apart from the nature of Alameda Research’s relationship with FTX?
The plot thickens when it becomes public notice that Alameda Research’s balance books are unbalanced. Alameda Researched is valued at around $14 billion, but a bulk of that liquidity lies in FTT tokens.
$3.66 billion was attributed to unlocked FTT tokens. The collapse of the coin would result in a massive hit which Alameda Research’s liquidity would not bear well. But that is not all.
One of the ills of decentralized finance is that it is unregulated. And FTX especially bowed out of submitting to the regulations by the US SEC. A chunk of Alameda Research’s net equity is FTT liquidity. This is in the form of tokens which the FTX protocol was responsible for creating.
The reason is now as clear as day.
Why did Zhao try to sell his FTT tokens?
Rumors circulating the media led to the mass inference that FTX would sell for $1 and Binance would come in for an emergency rescue.
Binance’s CEO signed an acquisition letter but failed to complete his part of the agreement because of matters he refused to disclose. However, news circulating the crypto space is that SBF fed the US regulatory bodies awry information about Binance.
What this means for Alameda Research is a liquidity problem. If the value of FTT tokens, upon which lies more than thirty percent of the company’s liquidity, plummets, this spells trouble for the trading firm and its investors.
Binance owns $529 million (23 million tokens out of 197 million in circulation) worth of FTT coins. $3.66 billion of Alameda Research’s wealth (1/3 of its assets) lies in FTT coins. These two companies are the key players in FTX’s crash, although they have different roles.
Alameda Research’s Role
For a company that trades volatility and relies on liquidity, only $134 million of its multi-billion-dollar assets is truly liquid. The rest, more than $14 billion, lies in crypto investments, including Solana.
The total volume of the company’s liquidity invested in cryptocurrencies is more than 7 billion dollars, half of Alameda Research’s real worth. This was unknown to the public until recently, and many believe this is one of the “recent revelations” leading to Binance’s desire to offload its FTT tokens.
Staking such an number of investors’ funds in the unstable crypto market is alarming. Considering that Alameda is a trading house, this implies that investors have their liquidity in tokens, as opposed to cash, because of situations like this.
The discrepancy in Alameda Research’s way of handling balance books shook the crypto world and was part of why investors took to selling FTT tokens. You see, there was an incentive to trade with Alameda Research, and that was a discount offered to FTT holders.
Users (up to a million) believed there was a liquidity crisis and exiting the market was the way out.
The hassle of withdrawing from FTX shook the firm and revealed that there was indeed a liquidity crisis. The crypto platform could not pay investors who were selling and halted withdrawal as a result, making it the third crypto exchange platform to collapse.
It was insolvent after being valued at $32 billion.
It all started when Ian Allison published data revealing that almost 6 billion dollars of Alameda Research’s worth were tied to its sister company. Almost immediately after the publication, investors sold up to 6 billion dollars of their various cryptocurrency portfolios, including FTT.
However, on Monday, November 8, FTX declared a withdrawal halt, showing the early signs of insolvency, like what happened with Voyager and Celsius earlier this year.
FTX breached a promise to its users, which is evident because of the pause on withdrawals. If the company did not speculate with holders’ portfolios, it would not have been challenging to continue furnishing withdrawals upon demand.
Considering who SBF has become in the crypto world, the tables have turned, and the rescuer now needs rescuing.
Just days before FTX filed for bankruptcy, Binance offered to help. This was a lifeline that would save FTX from the insurgency. The deal’s details were not made public, but it would save the company from the liquidity crisis (it could have been a loan).
However, Zhao walked out on the deal the day it was to be signed. Shortly after, he tweeted about his intent to sell the FTT tokens in his company’s possession.
Speculators say he heard something adverse about his company from the SEC. But it makes more sense to go with a generalized theory, which is FTX’s liquidity problems.
If it were a result of problems other than doctored or manipulated balance books, the buyout would have occurred successfully. Zhao had an obvious problem with SBF’s way of handling the books and even compared him with Luna founder Do Kwon, currently facing charges with the South Korean government. This does not bode well for FTT, and it drove holders to sell the market.
There are many speculations about the reason the buyout was not successful. It could be how Ellison (Alameda Research’s CEO) reached out to bargain the price of FTT tokens with Binance instead of allowing the company to sell fairly in the open market.
It could also be because of the (un)friendly rivalry between Zhao and SBF.
The move to sell FTT tokens happened before Binance decided to rescue the company. That didn’t happen, and shortly after, FTX paused withdrawals.
There is no doubt that Binance’s CZ knew the gravity of the massacre his tweet could cause. This is the reason many speculate that the sell-off was a ruse or means to drive FTX’s value even lower.
The waters surrounding the leadership and maintenance of FTX and Alameda Research are muddy. There may be shady dealings, such as breaching the company’s policy of leaving investors’ funds untouched.
Cryptocurrency projects are in their early stages. Although they have been around for over a decade, they are still a work in progress. Therefore, it should not be surprising when some tokens refuse to kick off, and others crash along the line.
This is not a justification for massive losses suffered by investors and crypto enthusiasts. But as they always say, never invest more than you can lose. The concept of decentralized finance is genius, no doubt. However, it will take time, resources (hopefully not a massive chunk of yours!), and, most significantly, experience.
In the case of FTX, the CEO was the reason for the crash. A lot of things are not as they seem, and the crypto sphere is a place to be very watchful when doing business there.