The cryptocurrency market cut losses on Tuesday as the two biggest crypto exchanges in the world, Binance and FTX, came to an agreement to fix the latest “liquidity crunch.”
Bitcoin was last lower by about 1% at $20,513.00, according to Coin Metrics. Earlier in the day it fell as low as $19,244. Meanwhile, ether was last lower by 2% at $1,560.20.
The two biggest cryptocurrencies by market cap spiked after hitting their lows of the session, just before Sam Bankman-Fried, CEO of crypto exchange FTX, announced on Twitter that the company has agreed to a sale for an undisclosed sum to Binance. Binance CEO Changpeng Zhao confirmed the news minutes later on Twitter. The U.S. arms of each company, Binance US and FTX US, are separate and unaffected by the news, Bankman-Fried, also known as SBF, said in his tweets.
The crypto market slid earlier in the day, before the deal came together, as investors’ worries about the solvency of FTX continued to fester, following rumors about the exchange and its sister company Alameda Research that emerged in recent days.
“There are a lot of mirrors to the Celsius and Three Arrows crisis that happened months ago and what you were seeing was investors having deja vu and fear leaking into the markets,” said Conor Ryder, research analyst at Kaiko.
Some of the biggest losses hit crypto assets tied to Alameda, the trading company also owned by SBF. FTX Token (FTT), the native token of the FTX trading platform, has fallen 21.5% in the past 24 hours, according to Coin Metrics. The token tied to Ethereum competitor Solana, of which Alameda is a big backer, has lost 10.7%.
In crypto equities, Coinbase climbed back into the green, after falling as much as 12.5% earlier in the morning. Robinhood, which SBF has a 7.6% stake in, was last lower by 5% after falling as low as 9%. Crypto banks like Silvergate and Signature and bitcoin miners like Hut 8 and Riot Blockchain were down double digit percentages earlier but have also bounced back.
Investor confidence had been shaken after Binance founder Changpeng Zhao tweeted over the weekend that the company would sell its holdings of FTT. Binance is the largest crypto exchange in the world by trading volume and was an early backer of FTX. On Tuesday morning FTX halted withdrawals from its platform, after spooked investors attempted to pull their funds en masse.
Zhao said in his tweet that Binance has about $2.1 billion worth of FTT and BUSD, the fiat-backed stablecoin issued by Binance and Paxos, combined.
“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” he said.
Those revelations refer to rumors about the solvency of FTX, the second-biggest crypto exchange in the world by trading volume. A report last week on the state of Alameda’s finances showed a large portion of its balance sheet is concentrated in FTT and its various activities leveraged using FTT as collateral. Alameda has disputed that claim, saying FTT represents only part of its total balance sheet.
“The Alameda hedge fund is tied to FTX through a ton of FTT tokens and the rumors started that if they are using all of these FTT tokens as collateral… there are two issues,” said Jeff Dorman, chief investment officer at Arca. “If the price of FTT goes way down then Alameda could face margin calls and all kinds of pressure; two is if FTX is the lender to Alameda then everyone’s going to be in trouble.”
“What could have been just an isolated issue at Alameda became a bank run,” he added. “Everybody started to pull their assets out of FTX and there’s this fear that FTX would be insolvent.”
A ‘black eye for trust’
Ryder said industry observers “generally” had confidence that FTX and its customers “will be fine” but that the panic was understandable. Before late Tuesday morning, SBF had said little on the matter to quell fears.
“The problem is the opaque nature and the lack of transparency about FTX reserves, Alameda’s reserves, the links between the two – no one really knows how to intertwined the two are,” he said. “From that side of things, it mirrors Celsius issues a lot in that we have no transparency of funds, and FTX hasn’t come out and reassured investors so that’s what we’re seeing now leak into markets.”
It’s a good argument for more regulation of centralized entities, Ryder added, saying it’s imperative for all centralized entities – be it hedge funds like Three Arrows Capital or Alameda Research or centralized exchanges like FTX and Binance that aren’t publicly listed – to maintain a proof of reserves for the sake of investor protection.
Dorman echoed Ryder’s sentiment, saying that while it may be at worst a short-term liquidity issue, it’s “another black eye for trust.”
“Do they put [the reserves] in a bank account? Do they use them to lend out?” Dorman said. “This is where the lack of transparency comes in: something that probably isn’t a problem and shouldn’t be a problem becomes a short-term liquidity problem if FTX can’t immediately process all withdrawals.”
