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Well, it’s happened again. Yet another major player in the crypto game has gone belly-up and the market's response, well, let’s just say, it wasn’t pretty - and that’s just the view in the first 24 hours.
TL;DR: Global crypto exchange FTX has basically collapsed, Binance stepped in to buy at a massive discount, the Government threatened anti-trust, and then CZ got the willies and looks like he might pull the deal. Result - Crypto market goes splat!
FTX is the exchange founded by two MIT graduates, Sam Bankman-Fried and Gary Wang in May 2019. Bankman-Fried (who we will refer to as SBF in this article) also founded a quantitative trading firm known as Alameda research a couple of years earlier.
Binance, already one of the largest crypto exchanges on the planet, was an early investor in FTX acquiring a sizable stake in the new platform. In 2021, FTX announced it was going to buy back its stake from Binance, with the deal, worth roughly $2.1B, being settled in a combination payment comprising BUSD and FTX’s native FTT token.
Binance had over half a billion dollars worth of FTT tokens when CEO Changpeng Zhao (CZ) announced, on November 6th, that Binance intended to liquidate its entire holdings of the token, setting in motion a series of events which has seen the crypto market take an absolutely gigantic dump today.
This is a pretty big, and still developing story, but stay tuned until the end, for some good news about how to get out unscathed in the future.
Why did Binance decide to take this very public step? Well, it may well have been part of the ongoing public bust-up between the two CEO’s, with Binance’s Director of Communications Patrick Hillman recently accusing Bankman-Fried of using his not-insignificant connections with powerful US government and media figures to engage in a bit of behind-the-scenes shit-slinging about Binance.
There are a couple of stories which seem to dovetail together here and are worth exploring to try to understand what caused the almighty clash between these two crypto Titans.
A chap named Brian Brook, former acting Comptroller of Currency in the previous US administration under President Trump, had taken on the post of CEO of Binance US however he resigned after a short few months stint, and neither he, nor CZ, seemed to be up for talking about what had happened. There were rumours that Brook had become quite pally with SBF, and was leaking confidential information relating to Binance to him, although it should be noted that Binance claimed someone (Brook?) was leaking confidential information, but simultaneously that this info was fake news.
It gets worse, however. Media outlet Reuters went on the offensive against Binance, publishing a hitpiece accusing the exchange of being a “hub for hackers, fraudsters and drug traffikers”. Binance hit back, of course, but on October 17, CZ publicly stated that Reuters were attempting to Doxx his family.
On November 2, Coindesk ran an article about SBF’s other company, Alameda Research, and claimed to have had access to a leaked Alameda balance sheet.
This which showed that a huge proportion of the trading firms' $14.6 Billion worth of assets was actually denominated in… you guessed it… FTT tokens, both locked and unlocked - which were of course issued by FTX, alongside a large holding of Solana’s native SOL token.
There were insinuations that these could have been used in collateralising loans in USDC as well as some other tokens.
Now, the problem is that, if this was indeed the case, and there was a significant drop in price of the FTT token, this could expose Alameda to margin calls and the risk of forced liquidation - in other words, the collateralised tokens would be sold into the market.
It was even suggested by some that even a relatively small sale of FTT would be enough to move the market much lower.
Back to our old friend, CZ, who by now is probably feeling somewhat pissed off with Sam Bankman-Fried following their recent, and very public spat. This information is pure gold for CZ, and he sees the opportunity to stick one-in-the-eye to FTX and Bankman-Fried in particular. On 6 November, CZ announces that Binance intended to sell its entire holdings on FTT - you remember, the hundreds of millions of dollars worth that it received from exiting as an original FTX shareholder.
The net effect of this was of course a pile-on - If Binance were going to dump FTT, every savvy investor would immediately scramble to do the same, thus tanking the price even further.
But CZ didn’t stop there. Later on the same day, he went on to twist the knife, with the following tweet:
Linking FTT to learning from LUNA? Ooof!!!
As a reminder, LUNA collapsed in May 2022, following the de-pegging of the Terra UST stablecoin, and the resulting contagion, and especially the collapse of 3 Arrows Capital, sent shockwaves through the cryptosphere, wiping out billions of dollars from the global crypto market and tanking the price of Bitcoin, and all the Altcoins with it.
It didn’t help matters that Alameda’s CEO Caroline Ellison went on to say that Alameda would happily buy all of Binance’s newly offered-for-sale FTT tokens at $22. This was a big mistake, because it indicated that below this level, Alameda was potentially exposed to liquidation on its loans.
CZ must have been laughing his head off at this, and dismissed the offer, saying he preferred to “stay in the free market” rather than do an Over-the-counter deal.
Caroline, it seems, by making this public offer may well have inadvertently sunk the company even further into the quagmire. Naturally, given this information, the hyenas (short sellers) jumped in, putting even further pressure on the token.
By this point, one would think that SBF would be literally wearing his plastic pants - because anyone with any sense could see the whole situation was about to get a whole lot worse.
Yes, the FUD was now in full swing, and it wasn’t just Alameda that was being hit, it was by extension FTX itself, as the issuer of the FTT token. What happened next was the inevitable stampede for the exit, as traders scrambled to dump FTT as quickly as they possibly could.
Speculation began to rise that FTX wouldn’t be able to process withdrawals, and of course, this was indeed a self-fulfilling prophecy, as on November 8, it did appear that withdrawals were halted.
On the morning of the 8th, over $1B had exited the platform. By the afternoon, FTX was literally puking deposits, and over $6B had been withdrawn.
It would appear that in the cryptospace, no-one can hear you scream… because everyone’s gone.
Bankman-Fried by now was pretty much forced to go around with the proverbial begging bowl, asking for emergency funding from his good buddies in Silicon Valley and Wall Street.
This is after he went on the record to say that FTX had enough to cover all client holdings, and even seemed to suggest that it was all fine, as FTX deposits were all held in cash.
This, clearly, was a massive porky-pie told to try to calm a by now very panicked market, and he soon after deleted the tweet.
Nothing at all unusual there, of course, but here is the backup, which we rather expect may well end up as a court exhibit at some point in the future.
Anyway, SBF it seems soon discovered the truth about the Billionaire club, which is that everyone’s your friend when you’re on the up-and-up, but the moment you start to smell like Skid Row, the whole lot of them disappear. That’s right, he didn’t manage to find a single one of them who felt like bailing their old pal out.
All was looking like it was lost for SBF, FTX and Alameda - that is until the CEO of a rival exchange turned up and offered a lifeline. That CEO was none other than… drumroll please… CZ of Binance, the man who up until then had pretty much been the sworn mortal enemy of Bankman-Fried.CZ suggested that SBF had actually approached him asking for help, and that Binance had agreed to sign a (and this next bit is important) NON BINDING LOI (Letter of Intent) to fully acquire FTX.
This possibly is one of the smoothest corporate plays the crypto world has ever seen, and we’d bet a pound to a penny that one day it will make for a great movie.
So, Bankman-Fried has been humiliated, and a huge chunk of his personal wealth has been wiped out in the space of a few days, and Binance’s CZ appears to have been the pivotal player in this tragic and ongoing drama.
But now, at the time of writing this article, it appears that CZ might be getting cold feet at the idea of the deal. In the last few hours, Coindesk is reporting that the deal might not go through after all, now that CZ has spent all of half a day reviewing their rival's books.
Add to that the US government regulators wading in, with talk of them threatening to sink the deal themselves, citing anti-trust concerns as laws such as the Sherman Act prohibit direct competitors from acting to protect one another, and as CZ said that he had stepped in to “protect users” after a “significant liquidity crunch” at the request of FTX, and that very much sounds like just such an illegal agreement.
This is still a developing story, but the fallout from this has been absolutely huge.
In the last 24 hours, the entire crypto market has literally prolapsed. Bitcoin has shed over 10% today, and Ethereum has fared even worse. Solana has been absolutely busted, dropping 40%, and other Alts have seen tumbles of between 5 to 20% each.
This has probably been about as bad a day as it gets.
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