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Key Takeaways
Binance has signaled that it plans to acquire FTX as the younger exchange battles a “liquidity crunch.”
Crypto prices are plummeting in the fallout from the bombshell announcement.
FTX’s demise is likely to have a negative impact on crypto for many years to come, but the industry has weathered many harsh storms in the past.
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Yet another disaster has hit the crypto space, but there are reasons to stay positive, Chris Williams writes.
FTX and Alameda Go Bust
News of Binance’s plans to bail out FTX as the exchange faces a “liquidity crunch” has panicked the cryptocurrency market.
Rumors that Sam Bankman-Fried’s exchange and unofficially affiliated trading firm Alameda Research could be insolvent have been doing the rounds in crypto circles for several days, but it still came as a shock to the community when Binance CEO Changpeng “CZ” Zhao and Bankman-Fried announced the potential acquisition late Tuesday.
In the days leading up to the announcement, FTX’s FTT token took a beating after a CoinDesk report alleged that illiquid FTT constituted the bulk of Alameda’s collateral. When Alameda CEO Caroline Ellison surfaced on Twitter over the weekend to say that Alameda held other assets that weren’t mentioned in the report, Zhao stoked the fire minutes later by announcing that Binance was planning to sell off its FTT holdings. “As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT),” he tweeted. “Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.” Binance was FTX’s first investor and consequently held a large allocation in the firm’s native token. Ellison then publicly offered to buy Zhao’s allocation at $22—likely in a bid to signal to Crypto Twitter that the firm was solvent.
Alameda’s woes continued, however, when FTT plummeted through Monday, breaking below crucial support at $21 despite a whale’s repeated attempts to hold onto the level. Alongside Alameda, it was rumored that FTX could also be in trouble, leading to a bank run that saw $6 billion of capital leave the exchange in 72 hours. The events prompted Bankman-Fried to announce to his followers that FTX and its assets were “fine” in a since-deleted tweet.
The latest developments suggest that Bankman-Fried and Ellison may have been misleading their followers. It’s speculated that they were hoping to instill confidence in the market and prevent a “bank run” scenario, similar to how Celsius CEO Alex Mashinsky, Three Arrows Capital co-founder Su Zhu, and Terra figurehead Do Kwon all posted reassuring messages to the community while they were battling huge fires behind the scenes.
The Market Panics
Zhao’s announcement of a possible bailout has hinted at a possible recovery for one of crypto’s largest companies, and both he and Bankman-Fried have said that the priority will be on making affected customers whole. Still, that’s done little to dispel fears in the famously volatile crypto market, and recent reports suggest that the buyout may not even go through.
FTT took a staggering hit after the announcement and is now trading well into the single digits. Per CoinGecko data, it’s currently changing hands for less than $4, down around 78.5% over the past 24 hours.
SOL has also suffered in the downturn. Solana’s native asset traded as low as $16.50 Wednesday following a 45.5% nosedive, leading a day of market bloodshed across other Layer 1 blockchains. Many Solana DeFi tokens have taken bigger hits, while its NFT ecosystem is collapsing. DeGods, the biggest Solana collection of the year, has seen its floor price drop 70% overnight.
Solana has publicly formed a close relationship with FTX over the past two years, and FTX has long been the de facto exchange of choice for Solana ecosystem tokens. In 2021, Bankman-Fried became something of an unelected spokesperson for Solana, helping it rally from $3 to an all-time high of $259 by endorsing the project as his profile grew. Solana’s downturn in the wake of FTX’s collapse is unsurprising given Bankman-Fried’s frequent endorsements of the Layer 1, but its prospects are made worse by an upcoming token unlock that will see 54.4 million SOL released into the market.
Crypto’s major assets have not been spared in the fallout either. ETH has erased the gains it posted late October through early November, now trading at $1,171 after a 23.5% hit. Interestingly, however, ETH holders have something to celebrate as the asset has flipped to net deflationary amid the market panic. The combination of increased activity on the Ethereum network, the impact of reduced token emissions since September’s Merge event, and the network’s EIP-1559 mechanism has added pressure on the circulating supply, causing it to decrease even as ETH’s price falls.
Bitcoin has also plummeted as market confidence wanes. It’s currently trading at a two-year low of around $17,024, sliding below the levels it hit in June off the back of the liquidity crisis that hit Three Arrows, Celsius and other major lenders. Market participants spent much of the summer and autumn debating whether the market had hit a bottom, and after today’s bloodbath, all eyes are watching for a daily close below the June levels. A Bitcoin close below $17,600 would hint at a breakdown, with the next crucial level sitting at around $14,000.
Crypto stocks have suffered as well. Coinbase (COIN) shares tanked 9% on market open Wednesday, hinting at waning confidence in centralized crypto services. After the selloffs of the past 24 hours, the crypto market has plummeted to $877 million, down 12.5% today and sitting at a fraction of the $3 trillion valuation the market hit just one year ago.
With FTX Done, What’s Next for the Market?
Bitcoin is still the leader in the crypto market; when the so-called “King” moves, the rest of the market tends to follow. Bitcoin breaking down to its yearly low is a bad sign—if the top crypto fails to hold above this level, the market could be in for more pain ahead.
To make matters worse, looking beyond the impact of the FTX crisis, the Bureau of Economic Analysis is due to publish its latest Consumer Price Index report Thursday. Inflation hit 8.2% in September, and if tomorrow’s numbers come in hot, global markets are likely to suffer. If the print shows that inflation has not yet posted a meaningful decline, crypto is likely in for another hit. Inflation levels have been a key factor behind the crypto market’s dismal 2022 performance as the Federal Reserve has been committed to an economic tightening policy to curb rising prices. The U.S. central bank announced its fourth 75-basis point rate hike of the year on November 2 and is widely expected to hike the funds rate by another 50 basis points to 4.25% to 4.5% next month. The Fed has repeatedly signaled that it wants to see inflation hit 2%, and as long as the numbers are high, crypto could be in for some suffering. While investors have been hoping for a pivot, it could take a recession and surge in unemployment for the central bank to change its stance.
With the gloomy macroeconomic backdrop to one side, it’s worth looking back to other similar market-shaking events, such as Terra’s $40 billion collapse and the ensuing Three Arrows blowup. Both of these events had dramatic spillover effects on the market that resulted in weeks of pain as many major crypto players were heavily exposed to both titans.
Similar to Terra and Three Arrows, FTX and Alameda were among crypto’s biggest players up until their liquidity issues. Many major firms have exposure to the two, so a similar drawn-out “contagion” scenario is likely. Galaxy Digital has already revealed it took at least a $29.3 million hit on funds tied to FTX.
Some firms from the traditional finance world also had exposure to Bankman-Fried’s empire. While it’s rumored that Binance agreed to acquire FTX for just $1, the firm hit a $32 billion valuation earlier this year, pulling in investment from SoftBank and the Ontario Teachers Pension Fund. To date, few pension funds or other traditional finance firms have invested in crypto; recent events will likely dissuade any others from exploring the space anytime soon.
In 2021, the “Supercycle” thesis did the rounds as Three Arrows and others suggested that crypto had crossed the chasm and wouldn’t likely suffer from the brutal drawdowns it had experienced in previous market cycles. However, the Supercycle theory was disproved in 2022, and the latest crisis has given credence to the idea that Bitcoin and the broader market could still be in for further downside. Previous crypto bear markets have not seen crypto firms on the scale of FTX blow up, and the abundance of leverage in the system has caused several other huge collapses throughout the year.
In the 2018 crypto winter, described by those who endured it as one of the most brutal periods in the history of the asset class, Bitcoin suffered an 80% drawdown from its peak, while Ethereum shed more than 94% of its value. An 80% correction from the November 2021 peak would put BTC at around $14,000 and ETH at its June 2022 lows of roughly $800. As crypto market history has shown, such extreme volatility cannot be ruled out, particularly in the midst of chaotic events.
Upcoming Challenges for the Industry
Whatever comes of the FTX crisis, it’s abundantly clear that the crypto industry will face huge challenges from the fallout. Bankman-Fried had been lobbying Congress in hopes of swaying the government’s rules on the space over recent months; he was widely criticized by the community when he proposed a ruling for the DCCPA bill that would threaten the future of DeFi. With Bankman-Fried’s trustworthiness dashed, regulators on Capitol Hill could take a harsh approach toward monitoring the crypto space. If FTX can go bust, that means customers are at risk—something regulators want to avoid as much as possible.
Just as they did with Kwon, Mashinsky, and the Three Arrows co-founders, onlookers have speculated that Bankman-Fried could face jail time depending on how FTX held its customers’ assets. While there are still many unknowns, the rumors that Alameda was trading FTX’s books would doubtless land Bankman-Fried in hot water with the authorities. The 31-year-old media darling also reassured his followers that things were “fine” hours before it transpired that they weren’t; his efforts to cover his tracks by deleting his tweets certainly don’t look good.
The crypto winter of 2022 has exposed clearer than ever that the industry has a habit of glorifying unscrupulous figures. Bankman-Fried, Kwon, 3AC, and Mashinsky have suffered huge falls from grace and emerged as villains this year. Such events lead to a loss of trust as the community often becomes emotionally attached to industry idols—to say nothing of the financial losses. Celsius customers are still waiting for their funds after the lender froze withdrawals in June. In a worst case scenario, FTX customers could also lose billions of dollars if the Binance buyout doesn’t go through. This would further knock market confidence after several other similar events.
Following the events, Zhao proposed using Merkle tree technology to prove his firm’s held assets, and several other exchanges have since committed to using the same strategy to prove their reserves. It’s likely that oversight of centralized exchanges will become tighter due to FTX’s demise.
While FTX is only one centralized exchange, its giant size prior to collapse doesn’t bode well for other similar enterprises. Plus, after a string of so-called “CeDeFi” services like Celsius left customers unable to access their funds when they went insolvent, the recent events will likely lead to a further decline in trust in centralized services. “Not your keys, not your coins,” has been one of crypto’s favorite mantras since the devastating collapse of the Mt. Gox exchange in 2014, and the FTX event has drawn comparisons in terms of scale and potential impact on the sector. The events could lead to more crypto users taking self custody over their assets, potentially setting the stage for decentralized finance space to shine. Unlike with FTX or Mt. Gox, crypto users don’t run the risk of a centralized party betting away their assets or shutting down and vanishing when they use DeFi because everything is transparent and recorded on-chain. Still, it could take years for a DeFi renaissance or even crypto confidence to return.
From Adversity Comes Opportunity
While the drama surrounding FTX could have negative ripple effects on the industry for some time, it’s worth zooming out to look at the big picture.
As the market has proven over the past 24 hours, bad news events can have an impact on crypto prices, but bear markets can provide investors with an opportunity to accumulate fundamentally sound assets at a discount. Despite the negative news circulating, blockchain technology’s promise hasn’t changed (in fact, it could be argued that the events highlight the strength of DeFi).
As with other events that posed an existential threat to crypto’s future, builders haven’t stopped building. Crypto has attracted some of the world’s brightest minds over the past 14 years, and there’s good reason to believe that they will succeed in building a better future.
Crypto has historically rewarded the patient—and those who can stomach extreme price volatility. Crypto has overcome negative price action and bad news in the past—and while history doesn’t repeat, it often rhymes. While it looks like FTX is no more and crypto winter persists, for those who plan to stick around, brighter days will come once interest in the technology returns.
11/09 Update: Binance has announced that it will not be proceeding with the planned FTX acquisition citing due diligence checks and reports regarding “mishandled customer funds.” Read the full statement here.
Disclosure: At the time of writing, the author of this piece owned ETH and several other crypto assets.
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