FTX’s native token, FTT, plummeted massively after Binance, a leading cryptocurrency exchange, announced that it would buy FTX.
On Monday, the coin was trading around $22 before dropping to just $5 by Tuesday afternoon. A total of $2 billion was lost in the sell-off over a 24-hour period.
Binance’s CEO Changpeng Zhao, known as CZ, twittered that FTT would likely be “highly volatile in the coming days as things develop.”
After the news, the cryptocurrency market took a beating on Tuesday, with both Bitcoin and Ethereum dropping over 10%. Similarly, Coinbase’s shares suffered a double-digit decline, along with Robinhood, a firm that allows traders to exchange cryptocurrency, declined by nearly 20%.
“The deal is quite possibly the most dramatic in cryptocurrency history,” commented Nic Carter, a partner at blockchain investment firm Castle Island Ventures. “This basically consolidates two of the largest offshore exchanges into one, a huge victory for CZ and Binance — but a complete disaster for FTX.”
A non-binding deal was reached between two exchanges following what FTX CEO Sam Bankman-Fried called “liquidity crunches” at his company, which previously this year had a market capitalization of $32 billion.
Only FTX’s non-American businesses will be acquired by Binance, while the US part of the company will keep its independence. A 2021 audit, however, showed that the US operation contributed just 5% to the company’s earnings. The corporate headquarters of FTX is located in the Bahamas, in the residence of Bankman-Fried.
In a similar vein to many crypto companies, FTX had its own token, called FTT, available for purchase like BTC. Among the promises made to FTT holders were better trading conditions and the earning of interest, as well as benefits such as blockchain fee waivers. FTT and other tokens can be profitable when their value increases; however, they’re not regulated and are extremely vulnerable to market fluctuations.
The Binance exchange announced in 2019 that it had made a strategic investment in FTX and stated it was taking a long-term stake in assisting the FTX ecosystem in growing sustainably.
Considering Binance’s importance in the crypto industry and its significant stake in FTT, it has a big influence on the market’s view of FTX and on the company’s performance. Over the weekend, the confidence of investors in FTX was shaken by Zhao’s tweet about Binance selling all its FTT holdings.
FTT and BUSD, Binance’s own stablecoin, were worth $2.1 billion, Zhao said.
“Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” the CEO announced.
FTT, which reached a peak of $78 in September last year, traded around $25 on the day before Zhao’s tweet. Monday, the token dropped below $16 and plummeted precipitously shortly after Tuesday’s announcement. The circulating supply of FTT has fallen from $2.9 billion to $735 million in just one day, as CoinMarketCap data shows.
Roughly $6 billion had been withdrawn from FTX during the 72 hours preceding Tuesday morning, according to Bankman-Fried. Typically, there are tens of millions of dollars in net inflows per day.
“Sam’s willingness to deal indicates that FTX was deeply damaged by the capital outflow that started 48 hours ago,” Carter noted. “We do not know what was at fault, whether they were lending out or gambling with customer funds.”
On Tuesday, the FTX platform stopped accepting withdrawals, provoked by investors’ panic — similar to other crypto companies that have collapsed this year, including Celsius, Voyager Digital, and Three Arrows Capital.
In response to the FTT news, concerns have been raised about Alameda Research, a trading firm owned by Bankman-Fried, which is affiliated with the FTX exchange. Last week’s report on Alameda’s financial health revealed a significant concentration of FTTs on its balance sheet that had been used to collateralize a wide range of operations. The company has denied that claim, asserting that FTT constitutes only a small portion of its total assets.
“With FTT’s price dropping sharply, Alameda may face margin calls and other pressure,” said Arca’s Jeff Dorman. “There will be trouble for everyone if FTX is Alameda’s lender.”