Life in the cryptocurrency industry is rarely quiet for long, and after a tumultuous summer, the market now appears to be entering a ‘crypto winter’. Over the past week, the founders of two of the largest cryptocurrency exchanges – Binance and FTX – have had a public Twitter spat that triggered the collapse of one exchange and a failed bailout of the other. Unsurprisingly, these events have caused widespread panic across a market that has barely recovered from several major failures earlier this year.
Binance, which is estimated to be worth more than $300 billion (£263 billion), was actually FTX’s first investor in December 2019. Since then, FTX has grown to be worth more than $32 billion in January last year, including mainstream finance giants such as BlackRock and SoftBank among its many backers.
Binance CEO Changpeng Zhao and FTX founder Sam Bankman-Fried (commonly referred to as CZ and SBF respectively) are two of the most influential people in the cryptocurrency exchange world where investors can buy, sell and store digital currencies. While Zhao has been associated with regulatory concerns surrounding Binance, Bankman-Fried was seen as a relatively stable and ambitious figure in the wild west of cryptocurrencies. He stepped in to rescue failing companies during last summer’s crypto bust and has made a point of talking to the media and US politicians.
What happened to FTX?
Bankman-Fried’s empire included the FTX exchange business, as well as Alameda Research, a trading firm that was supposed to be separate from FTX. But a recent story from industry news site Coindesk reported that Alameda’s balance sheet was dominated by FTT. This is the crypto token or coin issued by the FTX exchange, which gives holders a discount on trading fees on the marketplace.
FTT is fully controlled by FTX, Alameda’s sister company and can be “printed” as FTX wishes. Alameda also had $3.37 billion across a number of other cryptocurrencies, such as Solana and Serum, meaning any cryptocurrency collapse could seriously affect the company.
While there is nothing illegal or wrong with these holdings – especially in the notoriously unregulated crypto industry – the report showed Alameda’s heavy reliance on a coin invented by its sister company and not a coin issued by an independent backer or as legal tender by a government. If a company in such a position gets into trouble, such assets will be useless to support the business and protect users because they will also fall in value. This discovery about Alameda’s balance sheet led to liquidity concerns for the entire company.
In fact, after the Coindesk news broke, Binance CEO Zhao tweeted plans to liquidate the remaining FTT on Binance’s books. In another post a few hours later, he called the move “post-exit risk management, learning from LUNA” (a reference to a roughly USD 60 billion crypto crash that occurred earlier this year).
Zhao has 7.4 million followers on Twitter, so his tweets influence the market. The value of FTT fell from US$22 on Sunday to US$4 on Tuesday afternoon, while FTX was inundated with a reported US$6 billion in withdrawal requests. Some customers were unable to access their cryptocurrency holdings on the exchange due to the number of requests.
Bankman-Fried responded Monday by saying a “competitor is trying to go after us with false rumors” and added that “FTX is good” (he later removed the tweet). But it seems this was too little, too late: the total cryptocurrency market capitalization fell from more than $1 trillion to around $830 billion in a matter of days.
In a surprise move, just days later both Zhao and Bankman-Fried (above) tweeted details of a deal for Binance to buy FTX. But the Wall Street Journal reported the evening after that Binance had decided not to proceed with the deal after reviewing FTX’s finances and business structure.
A tweet from Binance (below) said “the issues are beyond our control or ability to help”. Furthermore, Bloomberg reported that US regulators, the Security and Exchange Commission and the Commodity Futures Trading Commission, have both investigated FTX regarding the handling of clients’ funds.
Crypto winter
The cryptocurrency industry has struggled over the past year, particularly since the failure of Terra and Luna tokens in May, the collapse of lender Celsius Network in June and the subsequent bankruptcy of hedge fund Three Arrows Capital in July.
The near-collapse of one of the biggest names in crypto, followed by the will-they-or-won’t-they nature of the Binance bailout has had an effect across the entire crypto industry, with Bitcoin falling by more than 18% during these events. The failure of this bailout will do little to boost confidence in the sector and could precipitate a crypto winter by increasing fears of price volatility and the need for future bailouts.
The value of the FTT coin is down almost 90% and trading volumes on FTX fell by more than 70% in the 24 hours surrounding the bailout. Much of this lost activity will move elsewhere, meaning the collapse of FTX could make Binance bigger. This could encourage regulators to start looking much more closely at the space.
Of course, the ultimate irony is that one of the main characteristics of cryptocurrencies is supposed to be decentralization, but recent events may well lead to more centralization as activity consolidates around one exchange. This may discourage some crypto enthusiasts from using Binance in the future.
