Things have escalated since Matt warned users about FTX’s potential liquidity problems. We cover what happened, what this means and why there could be more pain ahead.
Key Takeaways
- Crypto markets have plummeted after a shocking series of events involving behemoths of industry: Binance, FTX and Alameda Research.
- Binance has expressed interest in acquiring one of its main rivals, FTX, for an undisclosed amount.
- The deal does not include Alameda, FTX US or Binance US.
- Contagion risk is high, particularly at a time when lots of material information remains unknown.
What Happened?
Yesterday, rumours surfaced of FTX—a leading crypto exchange—being insolvent. Matt warned members about the issues and suggested withdrawing funds and Checkmate covering the situation in depth.
In short, the situation went like this:
(i) Binance co-founder ‘CZ’ announced that Binance is selling vast amounts of acquired FTT tokens (Binance was a core investor in FTX) due to “recent revelations” and rumours of FTX’s potential insolvency.
(ii) FTX and its sister company Alamada Research were over-leveraged with collateral backed by this FTT token.
(iii) FTT sells off heavily, causing collateral to lower in value and placing pressure on the balance sheet.
(iv) Panic grips the market and users rush to withdraw funds from FTX, causing >6B in withdrawals in a matter of days.
(v) Overnight, FTX is forced to halt withdrawals due to withdrawals and is forced to seek help from Binance via a potential acquisition of FTX to ensure all funds are backed 1:1 and withdrawals are turned on. In a last-ditch effort, FTX tried to raise $1B overnight, upping their ask to $6B by midday.
Why This Matters
FTX is one of the biggest crypto exchanges. Its co-founder, Sam Bankman Fried (‘SBF’), has built strong relationships with U.S. policymakers, donated heavily to politicians, and testified in several congressional hearings centred around crypto policy.
This will have significant impacts on the crypto industry from regulators. Arguably, CZ published the tweet knowing that it’d likely cause a mass of withdrawals from one of his closest competitors and that this would test whether the exchange was indeed solvent.
Either way, this is a bad look for the industry and shows the real issue of a lack of transparency in the space.
The move is a shock, with even industry veterans amazed to see how things played out.
Market Reacts to the Chaos
Crypto prices have taken a beating today. Bitcoin (BTC) is -11% and ether (ETH) is -16%.
Solana (SOL) is -27% due to its deep ties to FTX. (The exchange was pivotal in kickstarting the Solana ecosystem.)
Why Markets Could Suffer Contagion
There are multiple reasons why the market may suffer contagion over the coming days and weeks.
(i) SBF claimed they did not lend out user deposits. If this is untrue, it could be damaging. The tweet has since been deleted.
(ii) Binance’s agreement to buy FTX is a “non-binding LOI” meaning they can back out anytime. If things take a turn for the worst and Binance backs out market contagion could become worse. (LOI means letter of intent.)
(iii) Alameda Research was NOT included in any deal – they’re one of the largest trading firms in the space and have a murky relationship with FTX. Alameda recently had a few high-profile executives leave and hold a significant amount of FTT on the balance sheet (likely leveraged).
This poses the greatest risk to the market. Any lender who is a counterparty to Alamada could be in trouble as it’s unclear exactly how comprised Alamada is.
Update
Since our post, there have been a couple of tangible updates to the situation.
- Binance walks away from a deal to acquire FTX due to potential issues in the due diligence process.
- Major U.S authorities investigating FTX and co-founder Sam Bankman Fried (SBF).
More Infomation
We highly suggest watching Unchained’s stream discussing today’s events and what may happen in the coming days.
For those interested, below is SBF’s letter to investors.