Cryptocurrencies have been soaring in value this week, with Binance announcing plans to buy FTX (no longer the case), a top-five crypto exchange, only to back out the next day.
Now, a bankruptcy filing is more likely. This story has already seen a few twists and turns, so let’s take a look at what you need to know, what the lessons are, and how you can potentially take advantage.
Cryptocurrency aficionado and FTX owner Sam Bankman-Fried is known for his strong influence in the market. Rumors had been circulating over the weekend that his crypto empire might be in trouble, putting a lot of pressure on FTX. At one point on Tuesday, FTT was down over 85%.
FTX started in May 2019 and needed a “market maker” to provide trading liquidity to its customers. A market maker is a trader that helps to soak up what its customers are buying or selling. That’s where Alameda came in.
The liquidity attracted more traders to FTX, helping it grow rapidly. However, FTX has recently been thrown a couple of curveballs…
A week ago, on November 2nd, CoinDesk published an article saying there could be something fishy going on with Alameda’s bankroll. After reviewing a “private financial document”,
CoinDesk reported that Alameda had $14.6 billion in assets on June 30, along with $8 billion of debt. The problem, though, is what made up those assets: the balance sheet was loaded with FTT ($3.7 billion) and “FTT collateral” ($2.2 billion). In other words, about 40% of Alameda’s assets were in a volatile token created by FTX.
The crypto market was in a frenzy for three reasons. First, it’s estimated that Alameda and FTX hold about three-quarters of all the FTT tokens in existence. So if Alameda needed to sell those assets to pay off their debts, the price of FTT would collapse – with too few buyers to soak up all that selling.
If the price of FTT collapsed, so would Alameda – one of the biggest crypto funds around. This could cause market contagion, as we saw when the smaller crypto fund Three Arrows Capital imploded back in June.
Finally, investors started worrying that the line between FTX and Alameda could become blurry, and with fresh memories of Celsius Network’s collapse in June, they decided to pull their funds out of FTX in a hurry.
SBF’s empire was crumbling at the same time that his rival’s empire was growing. The whispers that he was secretly lobbying for a US crypto bill that would stringently regulate DeFi in the US, and hence starve out his competition from DEXs – including DEXs on the Binance Smart Chain – made it difficult for SBF to keep his empire afloat.
In a tweet on November 5th, 2019, CZ accused SBFs of “lobbying” and said that FTT tokens are “nothing” compared to Luna. This caused the FTT price to plummet, leaving Binance – one of the largest holders of FTT – with a significant loss.
Caroline Ellison, the CEO of Alameda, responded to Binance’s offer to buy all of their FTT tokens for $22 each by saying that CZ was not interested.
The market began to speculate that $22 was the “liquidation level” for Alameda, and that once that level was broken, the fund would be forced to sell FTT to cover its debts. Of course, the $22 level did break on Tuesday. After that, FTT’s value dropped by 80% and the overall crypto market dropped by about 15%.
CZ’s Tuesday tweet sent shockwaves through the crypto world – announcing that Binance would be acquiring FTX. Some suspect that CZ may have planned the whole thing, as it would be a major coup for Binance against one of their biggest competitors. If so, it was a masterful move on CZ’s part.
It’s too soon to know exactly how this will play out for FTX, Alameda, and the rest of the market, and there’s no telling how deep this debt rabbit hole goes. This week’s drama confirmed what investors already suspected – that Alameda and FTX are in trouble. SBF wouldn’t have accepted the terms otherwise
After Binance put out a statement saying FTX’s issues “are beyond our control or ability to help”, the deal is now off the table. Binance started a review of FTX’s finances, and obviously didn’t like what it saw.
But regardless of whether the deal went through or not, Alameda is still on the hook for all of its debt, so it may need to sell all its tokens (FTT and other tokens) to pay off its creditors. And since those creditors likely also have debts, that could put more downward pressure on the overall market.
The potential for further damage exists. It is uncertain if all FTX users will be compensated in full: the exchange might simply go bankrupt. If it turns out that FTX has not kept its customers’ cryptocurrency separate from Alameda’s, there may not be enough money left to pay FTX’s users.
That is why the saying “not your keys, not your coins” is so often repeated in the cryptocurrency community. When possible, always choose self-custody cryptocurrency storage solutions. Also, remember to diversify your risk by investing in multiple cryptocurrencies.
If you can stomach the volatility, there may be two long-term opportunities in the crypto world.
First, Coinbase’s rivals FTX and Binance could use this development to their advantage in the long run. For example, if Coinbase has less competition, this could affect the price of Coinbase’s stock. Additionally, Coinbase is the only publicly listed crypto exchange in the US, which means it is under more scrutiny. I will be writing more about Coinbase later this week.
In general, the crypto winter might be just starting, and it’s wise to sit that one through (for now). As we are all seeing, the layoffs in tech, the inflation that doesn’t subside, unemployment rate the FED needs to much to go up – just don’t, and overall fears of too much quantitative tightening and rate hikes may just send us all into a deep-deep recession…
But with fear levels getting so high, perhaps it’s time for the bravest (reckless?) to act accordingly and indulge in asset purchases, as for once, the “Black Friday” season for markets actually takes place in November. 😊
Safe Trading ❤️🇺🇦
Team of Elite Currensea