The cryptocurrency market fell on Tuesday after Binance and FTX, the world’s two largest crypto exchanges, agreed to merge to deal with what Binance called a “liquidity crisis”.
Bitcoin fell 12.6% to $18,203, according to Coin Metrics. Earlier today, it fell to $17,300.80, its lowest level since November 2020. Ether plunged 18.2% to $1,311.50, after falling as low as $1,228.89.
These declines spilled over into the rest of the market, at one point even stealing steam from the stock market rally. Smaller crypto assets tied to Alameda, the trading company also owned by FTX chief executive Sam Bankman-Fried, suffered some of the biggest losses. FTX Token (FTT), the native token of the FTX trading platform, plunged 76.4%. The token tied to popular Ethereum competitor Solanaof which Alameda is a big backer, lost 26.4%.
In crypto stocks, Coinbase slid 10.8% and Robinhood, which also has a crypto trading business and in which Bankman-Fried has a 7.6% stake, lost 19%. Other crypto-related stocks, including crypto banks Silvergate and Signature and bitcoin miners Hut 8 and Riot Blockchain, also lost ground.
The moves came after Bankman-Fried announced on Twitter that Binance will buy FTX’s non-US business for an undisclosed amount. Changpeng Zhao, CEO of Binance confirmed the news minutes later.
The deal will only affect the non-US businesses of FTX and Binance. Each company’s US arms, Binance US and FTX US, are unaffected, Bankman-Fried, also known as SBF, said in his tweets. The deal hasn’t been done and the companies have more due diligence to do, the CEOs said.
The crypto market slipped in early trading as investor concerns over FTX’s solvency swirled following recent rumors surrounding the exchange and its sister company, Alameda Research. The market briefly rebounded after the deal closed.
“There are a lot of mirrors to the Celsius and Three Arrows crisis that happened months ago and what you see are investors who have seen it before and are afraid to flee in the markets” , said Conor Ryder, research analyst at Kaiko.
A rumor that triggered a “bank run”
Investor confidence was shaken after Binance founder Changpeng Zhao tweeted over the weekend that the company would sell its holdings of FTT. Binance is the largest crypto exchange in the world by trading volume and was an early backer of FTX. On Tuesday morning, FTX halted withdrawals from its platform, after frightened investors attempted to withdraw their funds en masse.
Zhao said in his tweet that Binance has approximately $2.1 billion combined in FTT and BUSD, the fiat-backed stablecoin issued by Binance and Paxos.
“Due to recent revelations that have come to light, we have decided to liquidate any remaining TTFs on our books,” Zhao said.
This referred to rumors about the solvency of FTX, the world’s third-largest crypto exchange by trading volume. A CoinDesk report last week on the state of Alameda’s finances showed that much of its balance sheet is concentrated in FTT, and some of its various businesses are operated using FTT as collateral. Alameda disputed this claim, saying that FTT only represents a portion of its total balance sheet.
“Hedge fund Alameda is tied to FTX via a ton of FTT tokens and rumors have started that if they use all of those FTT tokens as collateral…there are two issues,” said Jeff Dorman, Chief Investment Officer at Arca. “If FTT’s price drops significantly, then Alameda could face margin calls and all kinds of pressure; two, if FTX is Alameda’s lender, everyone will be in trouble.”
“What could have been an isolated problem at Alameda has become a bank run,” he added. “Everyone has started pulling their assets out of FTX and there’s this fear that FTX will be insolvent.”
A “black eye for trust”
Ryder said industry watchers were “generally” confident that FTX and its customers would “be fine,” but the panic was understandable. Before late Tuesday morning, the SBF had said little on the subject to calm shaken investors.
“The problem is the opaque nature and lack of transparency about FTX reserves, Alameda reserves, the ties between the two – no one really knows how closely the two are related,” he said. “From that side of things, it reflects a lot of Celsius’ issues in that we don’t have any fund transparency, and FTX hasn’t come out and reassured investors, so that’s what we now see fleeing in the markets.”
It’s a good case for more regulation of centralized entities, Ryder added, saying it’s imperative for all centralized entities – whether it’s hedge funds like Three Arrows Capital or Alameda Research or exchanges. centralized like FTX and Binance that are not publicly traded – to maintain proof of reserves for the sake of investor protection.
Dorman echoed Ryder’s sentiment, saying while this may, at best, be a short-term liquidity issue for the market, it’s “another black eye for confidence.”
“Do they put [the reserves] in a bank account? Are they using them to lend?” Dorman said. “That’s where the lack of transparency comes in: something that probably isn’t a problem and shouldn’t be a problem becomes a liquidity problem at term if FTX cannot immediately process all withdrawals.”