For once this year, this paper will not begin by contextualizing macroeconomic elements that affect all markets in a specific direction. Rather, it was a new crisis entirely specific to cryptocurrencies that rocked the markets yesterday. As cryptocurrencies continued their gradual comeback alongside stock markets, it’s a saga involving giant Sam Bankman-Fried (SBF) exchange FTX — a crisis that could have made LUNA and Celsius look second-rate by comparison — which pushed the markets into the abyss. Let’s reserve this communication to explain exactly what happened. If the story is certainly troubling for short-term investors, it remains no less exciting on a business level, despite the significant and unpleasant financial impact.
Let’s put things in context. Binance is by far the most popular and profitable exchange in the cryptocurrency market. However, its closest competition was that of FTX, a company valued at several billion dollars. It’s these two titans who rubbed shoulders this week.
Binance predates the existence of FTX. A few years ago, Binance was an early investor in the FTX startup. However, Bankman-Fried’s growth strategies quickly paid off in a favorable market, with the exchange growing at breakneck speed to become 2e in market share, then Binance’s direct competitor. During the most recent crises, the SBF seems to be always involved, trying to buy failing entities. Just a few months ago, he was emerging as the industry’s potential savior. Fortune magazine went so far as to call him a possible future Warren Buffett, no less.
In this context where the two exchanges are already direct competitors, Binance decides to sell its shares in FTX. As part of the terms of the transaction, Binance agrees to receive the equivalent of two billion dollars in FTT tokens, FTX’s native token. This token was still worth $22 early yesterday. However, it is important to know that FTT does not have the transaction volume of a token like BNB (Binance’s native token).
Then, yesterday, Binance CEO Changpeng Zhao (CZ) publicly claims that SBF is badmouthing him to various regulators, trying to “confuse” his competitor to the potential detriment of the industry’s overall health. As a result, he announces to his 7 million Twitter followers that he is ready to sell all of his two billion dollars worth of FTT tokens on the open market. The message to the sign holders could not be more clear and ominous. Such selling pressure for a token of such volume and in a climate of uncertainty is enough to completely suppress its price. Panic gripped the markets. Everyone wants to sell their FTTs, but no buyers are rushing to the door. The price, surprisingly, drops significantly.
Enter Alameda, a parent firm of FTX and owned by SBF. This is one Market maker which officially holds $12 billion in assets and $7 billion in liabilities. However, half of the assets consist of FTT tokens, whose price is falling and whose market does not offer liquidity. Overnight, the firm appears in mortal danger. Alameda offers Binance to buy all of its FTT tokens for $22 each, but CZ has no intention of accepting this, de facto saying that he prefers to use free market forces instead. If Alameda suddenly faces such a risk, what about FTX, the very firm behind the FTT token? SBF may be sending a message that all is well and client assets are safe, but investors remember the recent sagas all too well. They are trying in front of the gates to remove all their crypto assets from FTX. The exchange faces more than $1 billion in withdrawals. A real liquidity crisis. or run to the bank modern.
Instead of appeasing exchange members, FTX is instead announcing a withdrawal freeze. Panic peaks. We quickly learn that there are no bitcoins left to withdraw from the FTX reserves.
Then, suddenly, an announcement that was absolutely unimaginable a few days ago. Binance buys FTX to get them out of trouble and keep client assets safe. Markets applaud the news for a moment with a strong rebound, before the dust settles. The worst-case scenario appears to have been averted for now. However, the price of one FTT token is now worth just $4.20, a drop of more than 80% in 24 hours. All those using it as collateral suddenly face a critical situation, being forced to sell their other assets such as BTC and ETH. One more time leverage of some market actors suddenly in crisis creates downward pressure on prices. Furthermore, we find ourselves with a suddenly highly centralized trading market. Additionally, Binance’s purchase agreement for FTX has not yet been initialized and is subject to preliminary due diligence review. However, CZ is only in the driver’s seat now. What will he do? The death of FTX is still not completely impossible. We know that markets hate uncertainty.
If you like the raw forces of capitalism, this story has something to fascinate you, regardless of its immediate price consequences. Within days, Binance started a rumor, made a public threat, leading to the purchase of its biggest rival for perhaps pennies on the dollar. A true hostile takeover between industry giants.
Note that the acquisition only affects the non-US business, FTX.com. FTX.us will remain independent from Binance. However, according to a 2021 audit, the US portion of FTX accounted for only 5% of revenue.
Later on Tuesday, CZ tweeted that he believes “all cryptocurrency exchanges should use merkle-tree proof of reserves.” In the same tweet, he added that while banks operate on fractional reserves, crypto exchanges should not. Zhao also later stated that Binance has never used BNB as collateral and that he believes no exchange should use its original token as collateral. History has told us three times and not once in 2022 already…
For Sam Bankman-Fried, this is what you might sarcastically call a bad day at the office. In 24 hours, the FTX CEO lost about $14.6 billion, or nearly 94% of his total wealth, according to the Bloomberg Billionaires Index. In fact, he is no longer on that list. SBF, 30, said last year that his company would be big enough to buy Goldman Sachs. He can forget about it. The 94% loss is the biggest one-day drop ever for billionaires.
It goes without saying that this saga continues to lead the markets. The price of bitcoin, which was still doing well last week, hit a new annual low. Will this control make it possible to quickly leave behind this crisis and return to the level of the last weeks? After all, the fundamental value of bitcoin and Ether certainly hasn’t changed. It is the level of uncertainty that has increased. On the contrary, will other pages of this history be written, with consequences today impossible to foresee? As one well-known analyst put it: “Stocks are doing well. An event The black swan has disrupted the price action for cryptos, but once that taste is out of people’s mouths, we should see $BTC and $ETH make a small rally. Again, the problem is not with the assets themselves.”
Volatility is sure to be present for some time to come. The next day was already predicted as such with the US consumer price index data for the month of October.
As for the fund, we were overweight ETH at the start of this crisis, which certainly didn’t help. On the other hand, we reacted quickly to transfer these assets to BTC during the first wave of sales, to then increase liquidity during the second wave. We estimate our losses in the last 24 hours to be equivalent to those of BTC, regardless of our initial position in ETH. Therefore, we are currently defensively positioned with a higher level of liquidity.
This article is brought to you by Fonds Rivemont. The Rivemont Cryptocurrency Fund is Canada’s first and only actively managed cryptocurrency fund. RRSPs and TFSAs eligible. Accredited investors can learn more here.
Disclaimer: This column does not necessarily reflect the opinion of CryptonewsFR and does not constitute investment advice or trading instructions..
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