Binance buys over FTX: Why FTT dumped 70% and a Timeline of Events between Binance’s CZ and FTX’s Sam Bankman-Fried (SBF) Saga
Recently, the price movements for FTT (FTX’s native token) and other closely-related tokens such as SOL (Solana) and its ecosystem coins have taken a beating. FTT has declined nearly 70% over the course of 4 hours on 8 November 2022, with Solana’s SOL down 20% and Serum’s SRM off 30%. In this article, we will discuss what happened and why FTX is taking the heat in the crypto space.
Here’s some context:
- CZ refers to Changpeng Zhao, who is the co-founder and CEO of Binance, the world’s largest cryptocurrency exchange by trading volume as of July 2022.
- SBF refers to Sam Bankman-Fried. He is the founder and CEO of FTX, a cryptocurrency exchange, and FTX.US, its U.S. affiliate.
- Sam Bankman-Fried’s cryptocurrency empire is officially broken into two main parts: FTX (his exchange) and Alameda Research (his trading firm), both giants in their respective industries.
- FTT is the native exchange token for FTX. Traders can use the FTT token to benefit from features in FTX Exchange such as lower trading fees on the exchange, enabling tighter trading spreads for OTC trades.
- Alameda Research is one of the most important trading firms in all of cryptocurrency, with previous Protos investigations revealing that Alameda was one of the two largest issuers of the controversial tether (USDT) token, receiving in excess of $31 billion worth of tether as of November 2021.
FTX Crypto Timeline of Events
CoinDesk Article on Alameda’s leaked Balance Sheet
On November 2, an article was published on CoinDesk laying out statements regarding SBF’s very own Alameda Research. It questioned Alameda’s balance sheet, and according to a private financial document reviewed by CoinDesk (it is conceivable the document represents just part of Alameda), that balance sheet is full of FTX — specifically, the FTT token issued by the exchange that grants holders a discount on trading fees on its marketplace is a HUGE majority on the balance sheet.
While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. The situation adds to evidence that the ties between FTX and Alameda are unusually close. Cory Klippsten also mentions that “the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token”.
Alameda Research was overvalued on the balance sheet due to too many FTT tokens
According to this article by Protos, Alameda Research was valuing the FTT it held at approximately 160% of the total market cap of FTT, which suggests that the true value of those assets are much less. (though this difference is partially due to variances between how CoinMarketCap and FTX calculate ‘circulating supply’)
If Alameda Research had $8 billion in liabilities ($7.4 billion in loans, by the way!) and they had >50% of their $14.6 billion of assets in illiquid and FTT tokens, it is quite possible that they would be at risk of liquidation.
Regardless, it seems that it was over-valued on the balance sheet, especially considering the difficulty in finding adequate buyers in a market where Alameda would be forced to sell.
Then one of Alameda Research’s important employees reacted to this. She is Caroline Ellison — CEO at Alameda Research.
She tried to justify the values on the balance sheet, saying that:
- that specific balance sheet is for a subset of our corporate entities, we have > $10b of assets that aren’t reflected there
- the balance sheet breaks out a few of our biggest long positions; we obviously have hedges that aren’t listed
- given the tightening in the crypto credit space this year we’ve returned most of our loans by now
Then Binance CEO Changpeng “CZ” Zhao decided to strike.
Binance CZ Sells Rest of FTX Token Holdings
Binance’s CEO, responding to the CoinDesk scoop about trading firm Alameda Research’s balance sheet, tweeted Sunday that he will sell the remaining FTT tokens held on his books that he took on as part of his exit from Alameda sister company FTX last year.
This tweet caused a downward spiral for FTT as it suggests that the grounds about Alameda’s balance sheet are legitimate enough for big players like CZ to derisk. Because of Binance’s central position in crypto and its large ownership of FTT, the company had particular sway over FTX and the market’s view on the company.
Not surprisingly, FTT dropped to about $22 after the tweet.
And then Caroline decided to reply to CZ’s tweet by saying that Alameda would buy all his FTT at $22 to prop the price of FTT tokens up.
But all that was not enough to quell the uneasiness that FTX investors have.
The market started to fall apart when traders worried about the actual collateral FTX/Alameda was holding on their books and speculation surfaced when other entities that were holding FTT tokens as collateral would unwind them. Something we have seen from Archagos in 2021 to Luna in 2022.
FTX Bank Run: $6,000,000,000 in withdrawals in 72 hours and FTX liquidity crunch
FTX pauses withdrawals
In the 72 hours leading up to Tuesday morning, FTX had seen around $6 billion of withdrawals, according to a message to staff sent by Bankman-Fried that was seen by Reuters. Also on Tuesday morning, Bankman-Fried wrote that withdrawals are effectively paused.
FTX’s stablecoin reserve reduced by 93% and reaches a year-low
Furthermore, FTX’s stablecoin reserves dropped by 93% within the past two weeks, showing more concrete evidence that the FTX ship is sinking.
FTX BTC held drops from 20,000 to just one
Data from Coinglass also showed a bitcoin balance at FTX of just one as of 9 November. That balance had been about 20,000 for the past month through as recently as 24 hours ago. This means that almost all the BTC that was held in FTX has been transferred out.
Over at Glassnode, the same statistics also suggests that over $360M Bitcoin leave FTX in 2 days, marking it the 10th largest withdrawal in 2022.
Seeing how this could have easily unfolded like Luna did back in May, traders jumped on this opportunity and decided to short the FTT token. The price of FTT token fell even further. Although Caroline tried to defend the $22 price, the line eventually broke and FTT dropped by a further >30% to about $15.
In the meantime, FTX CEO Sam Bankman-Fried tried to calm fears of a possible collapse by reassuring that FTX and its assets were fine and that the firm possessed enough to cover all of its clients’ positions.
The rest of the market followed suit and BTC dumped as well, dropping back to below $20,000 after a short-term peak of about $22,000. Questions of Alameda’s solvency status continued as people were now convinced that the company has insufficient assets to support its loans should the FTT token continue to fall in price.
2) FTX has enough to cover all client holdings.
We don’t invest client assets (even in treasuries).
We have been processing all withdrawals, and will continue to be.
Some details on withdrawal speed: https://t.co/tSjhJW3JlI
(banks and nodes can be slow)
— SBF (@SBF_FTX) November 7, 2022
SBF expanded further by claiming that FTX “has enough to cover all client holdings” and will continue to process all withdrawals. He closed his thread with the following statement, implying that the aforementioned “competitor” could be Binance:
4) I’d love it, @cz_binance, if we could work together for the ecosystem.
— SBF (@SBF_FTX) November 7, 2022
CZ didn’t want to work together. He wanted to do something else.
Binance buys over FTT
As everybody would have expected FTX to suffer a similar fate like Terra Luna, a spin of events caused the markets to pump instead. CZ Binance decided to fully acquire FTX.com and help cover a “liquidity crunch” at the rival exchange, in a stunning bailout that raised fresh concerns among investors about cryptocurrencies.
The acquisition affects only the non-U.S. businesses for FTX. The U.S. division will remain independent of Binance. However, according to a 2021 audit, the U.S. part of FTX accounted for just 5% of total revenue. FTX is based in the Bahamas, where Bankman-Fried resides
The markets reacted violently to this tweet since it meant that FTX is going to be saved by Binance from being insolvent. BTC pumped back up to above $20,000, and all other altcoins rallied as well.
Why FTX dump again and why BTC dump again
FTT drops to $3 after a few minutes of the pump
However, this pump did not last for long, as markets quickly retreated as the price of FTT token fully dumped from $15 to $3, largely in part due to the over-inflated value that the coin has and how CZ’s stance of FTT remains firm: “we were transparent about the fact that we are closing our FTT position”.
CZ later provided a bit more context on why Binance was selling its FTT, calling it “post-exit risk management.”
The markets also reacted badly to what seems like a full-on FTX liquidation moment, as BTC dumped to the lowest point of about $17,000.
Markets will continue to be more volatile in the coming days since CZ has mentioned that the acquisition deal outcome may change and it is not fully finalised. Although markets look weak right now, one thing is for certain: this is where fortunes were made or lost.
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