Why the crypto market has crashed
The crypto markets are down off the back of FTX's reported insolvency and takeover by Binance.
There's never a dull day in crypto, but today might be one of the most eventful in the industry's history.
Just after 3am AEDT on Wednesday 9 November, Sam Bankman-Fried (SBF), CEO of cryptocurrency exchange FTX, tweeted he would be selling FTX to rival exchange Binance due to serious liquidity issues.
This sent shockwaves through the market, with Bitcoin crashing almost US$3,000 before recovering slightly.
What does this mean for crypto?
As one of the largest and (formerly) most reputable cryptocurrency exchanges, the collapse of FTX rattled an already-nervous market, dragging many cryptocurrencies, including Bitcoin and Ethereum, down with it.
While SBF has insisted all affected assets will be fully covered, there could also be domino effects like those seen after the collapse of crypto fund Three Arrows Capital.
What happened with FTX?
1) Hey all: I have a few announcements to make.
Things have come full circle, and https://t.co/DWPOotRHcX’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for https://t.co/DWPOotRHcX (pending DD etc.).
— SBF (@SBF_FTX) November 8, 2022
In a Twitter thread, SBF stated he and his team had "asked Binance to come in" to help "clear out liquidity crunches", insinuating FTX did not have the liquidity on hand to do so itself.
Minutes later, Binance CEO Changpeng Zhao (CZ) tweeted to confirm that "FTX asked for [Binance's] help" and that he and his team had signed a non-binding letter of intent to purchase FTX.
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.
— CZ 🔶 BNB (@cz_binance) November 8, 2022
This agreement came after CZ tweeted that he was planning to dump upwards of US$500,000,000 of FTT tokens – the native token for the FTX exchange – on the public market less than 48 hours prior.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 BNB (@cz_binance) November 6, 2022
It was rumored that FTX had to defend the value of FTT at US$22 per token after Caroline Ellison – CEO at Alameda Research, a quant trading firm started by SBF – tweeted that Alameda would offer to buy all of Binance's FTT tokens at this level.
@cz_binance if you're looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!
— Caroline (@carolinecapital) November 6, 2022
Alameda successfully defended the US$22 level until late Monday evening EST when it began to dip significantly below, reaching a low of US$3.12 before rebounding to US$5.51 at the time of publishing.
The crash of FTT likely caused liquidity issues for Alameda – and potentially sister company FTX – due to the amount of debt the company had secured against the value of the FTT token. The devaluation of FTT means the company may be unable to service its debts.
12 hours following the crash of FTT, SBF made the announcement that Binance would acquire FTX.
What does this mean for FTX users?
Binance's offer to buy FTX is conditional and the deal is yet to be finalised.
Users have reported difficulty withdrawing funds from the FTX exchange, which may persist until the terms of the deal are settled.
2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. -- we apologize for that.
— SBF (@SBF_FTX) November 8, 2022
SBF said that "all assets will be covered 1:1" and that FTX is working to clear out the backlog of user withdrawals. Ensuring that user funds are covered is part of why Binance has been asked to step in and acquire the company.
FTX reported that FTX.US is a separate entity and its US customers should not be affected by the events surrounding the global FTX exchange.
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Disclosure: The authors own a range of cryptocurrencies at the time of writing.