You’ve probably heard about the crypto drama that has unfolded over the past three days and reached its peak this November 10. But if you haven’t, here’s the news:
Cryptocurrency exchange Binance recently announced its intention to acquire the FTX exchange in a strategic deal. According to Binance, FTX approached them for help due to the company’s liquidity shortage. But today, Binance said it changed its mind.
What made Binance reconsider? Let’s get into that in more detail.
Sam Bankman-Fried, a crypto-billionaire and Forbes Billionaire List under 30, got rich quickly by founding cryptocurrency exchange FTX and trading firm Alameda Research, which managed nearly $15 billion in assets at its peak. And since crypto-assets are visible to everyone thanks to their key property of recording all blockchain movements, some services, and individual analysts keep track of major crypto movements across the blockchain. And one day, an analyst under the pseudonym Lookonchain noticed on November 6 that 23 million FTT coins of FTX exchange (about $530 million) had been transferred from a cold wallet to the Binance exchange.
Only one person other than Sam himself had such a large stockpile. And it turned out to be Changpeng (known in the crypto-community under the concise acronym CZ and founder of Binance crypto exchange). He used to be an early investor in the FTX business, and for a part of the invested funds, he received tokens (coins) from Sam’s exchange called FTT.
He didn’t hide the fact that he sold FTT tokens and confirmed it on Twitter later. But he didn’t do it just because he wanted to. It was preceded by a rumor that Alameda had a balance and liquidity hole.
And this is Sam Bankman’s FTT coin chart from the 8th of November. Yes, yes, this is no joke. In one day, the coin dropped in value by 76%, and later in the day, the drop was 85%.
Following the grandiose token drop, users rushed to withdraw their money from FTX (especially experienced and observant ones who started doing it a few days before).
The worst thing for any financial company, be it a traditional bank or an advanced cryptocurrency exchange, is when everyone decides to withdraw their money all at once. That can kill even the healthiest risk-conscious financial institution. Because of this, the entire crypto market collapsed down the chain: Bitcoin fell 10% in a day, and other cryptocurrencies up to 25%). And this drastic decline created a snowball effect.
And then a huge plot twist happened. On Nov. 9, Binance announced it would not buy FTX.com. However, the day before, on Nov. 8, Changpeng Zhao announced that he would urgently acquire its bankrupt competitor.
He commented that as a result of corporate due diligence, as well as recent news about the mismanagement of customer funds and alleged investigations by U.S. agencies, he and the team of Binance have decided that we will not proceed with the potential acquisition of http://FTX.com. He published it on Twitter.
He also continued in another tweet: “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
As for the details of why Binance refused to acquire FTX, Binance found a financial “black hole.” It is the gap between the liabilities and assets of FTX. And this black hole is more than $6 billion. Zhao also made a theory that the exchange’s collapse was also from FTX’s bad faith.
But so far, the consequences for customers FTX and its sister trading platform Alameda Research remain unknown. But it looks like FTX clients are likely to lose their money.
CZ also explained that, unfortunately, every time a major player in the crypto or fiat industry fails, ordinary retail consumers suffer. When it comes to legal implications, U.S. regulators have launched an investigation into FTX’s use of its customers’ funds, according to Bloomberg News.
As of now, the collapse of 30-year-old Sam Bankman-Friede’s empire is a tragedy for the crypto industry as a whole. The former Jane Street Capital trader, who lost nearly his entire funds on the FTX exchange on Nov. 8, used to act as a savior of cryptocurrencies since the summer, maintaining the positive reputation of crypto. But right now, trust in cryptocurrencies is disappearing, causing many crypto assets to fall even further from the price they used to be. And after this drama, it will be very complicated for the crypto industry to return to the rails.