State of the Market Adress: The FTX Incident
Another pivotal event in crypto, investors who watched the show unfold on Crypto Twitter yesterday witnessed history in the making.
Another insolvency event and another centralized exchange corpse. FTX’s insolvency has sent panic through the market, and the resulting contagion has not yet entirely played out. However, bears are fully in control.
Bitcoin and Ethereum have broken key support levels, and the DXY’s bullish trend has not been broken: bad news for future price action. The result of the U.S. Midterms and October CPI data will likely introduce more market instability. Given the ongoing volatility in bond markets- the financial base of the pyramid- risk-on assets have nothing but pain ahead.
The Feud: Binance & FTX
CZ is a cold-blooded killer playing 5D quantum chess; anybody who crosses CZ will regret it.
Binance has signed an LOI (Letter Of Intent) to acquire FTX, likely to pay withdrawal requests and guarantee the safety of investors’ funds. FTX stopped processing withdrawals yesterday, and when an exchange cannot repay investors, it means they have done something they should not have done with the funds.
A mingling of investor deposits between FTX and Alameda has led to this incident.
TLDR: Alameda Research held a considerable amount of FTT (the FTX token and an illiquid asset) on its balance sheet, and CoinDesk reported this weakness; CZ went for the jugular and started a bank run, now FTX has become insolvent along with Alameda, and CZ swoops in to acquire it: crushing one of his most prominent rivals in the process.
Who/ What was Involved?
CZ, CEO of Binance
Binance is the world’s leading exchange ranked by volume and will likely become the world’s richest man in the next bull market. Binance is a behemoth of the crypto space and truly rose to prominence in 2017 thanks to the launch of its native token BNB and attracted huge amounts of liquidity thanks to its launchpad hosting ICOs (Initial Coin Offerings). Generally understood to be the gold standard of centralized exchanges for security and user experience.
Sam Bankman-Fried (SBF), Founder of Alameda Research & FTX
SBF founded Alameda Research, a trading firm, in 2017 and enjoyed enormous success throughout the 2021 bull market. Following this, SBF launched FTX in 2019, and it quickly became a mainstream centralized exchange. This informal association between the two companies has been brought to light with the recent events and has led to both downfalls. Alameda provided early liquidity for FTX and powered its early growth. Alameda has traded on FTX and propped up the ecosystem with liquidity.
FTT Token, Utility Token of FTX
Much of this incident comes down to FTT. FTX created FTT, and the token essentially tracks investor sentiment for the exchange. FTT has little utility and only enables a better user experience on the FTX platform through reduced trading fees.
The Backdrop
SBF has recently been lobbying heavily in Washington, and the crypto community widely viewed his regulation proposals as benefitting FTX at the expense of DeFi and other competitors. Customer deposits onto FTX were sent to Alameda Research for the firm to trade, and this mingling of assets was dangerous and crucified both entities.
The Story
CoinDesk publishes a report on Alameda Research’s balance sheet.
$14.6 Billion in Assets ($3.6 billion in unlocked FTT & $2.6 billion FTT collateral)
$8 Billion in Liabilities
FTT is an illiquid asset, and the market cannot handle a billion-dollar liquidation. Subtracting the liabilities from the assets and subtracting the FTT balance leads to concerns regarding solvency. Alameda was also using FTT to collateralize loans. FTT props up Alameda’s balance sheet, making it highly vulnerable to market fluctuations.
Caroline, CEO of Alameda, tweets about the balance sheet. A fund manager tweeting about a balance sheet never bodes well. She claims Alameda remains solvent, and this bluff of strength is typically seen during times of uncertainty.
CZ publicly announces he is liquidating $2.1 billion of FTT: hinting at the insolvency of Alameda. CZ openly declares he plans to dump $2.1 billion, a figure he knows that the market cannot absorb, and he caused widespread panic with this tweet. The man is ruthless.
Caroline offers to purchase all of Binance’s FTT for $22. Investors understand that $22 represents the line in the sand, and if FTT trades below this price, Alameda becomes insolvent.
Alameda heavily defends the $22 price with enormous buy orders before FTT finally capitulates. At this point, Alameda Research has become insolvent.
Throughout this selling frenzy, CZ went further on the offensive.
The comparison to LUNA, a Ponzi scheme led by Do Kwon that collapsed months ago, shows his intentions. He calls on the entire crypto community, and blood is in the water. CZ planned to and did annihilate SBF, FTX, and Alameda Research.
A bank run ensues, and investors withdraw hundreds of millions of dollars from FTX.
Alameda begins to send stablecoin directly to the FTX hot wallet, which pays user withdrawals. SBF publicly came out and stated that FTX has the liquidity to cover all withdrawals. However, both entities died when FTT broke through the $22 support.
FTX halts its withdrawal process. And it becomes glaringly apparent that FTX has been involved in under the counter movement of investor deposits with Alameda.
And finally, SBF tweets that Binance is buying FTX.
All of this took place between the 6th and 8th of November. Binance will audit FTX, see how big the hole in the balance sheet is, and see if it wants to proceed.
Closing Thoughts
Anybody with assets held on FTX has a right to be nervous. And anybody holding FTT has seen the value of their portfolio decimated. The question now comes down to contagion. How many entities were exposed to FTT, how much FTT has been used within DeFi as collateralization, and how much liquidation will take place?
Any group exposed to FTX or Alameda Research will take a significant hit. Most eyes rest on Solana’s native token SOL, which comprised a huge portion of Alameda’s balance sheet. Millions of SOL are currently being unstaked and look ready to hit the open market.
Another black swan shockwave has torn through the market and pushed asset prices lower. The foreseeable future looks incredibly bleak for crypto, and the ecosystem will take months to recover. Additionally, it gives regulators tons of ammunition. When investors cannot withdraw funds and their capital is in jeopardy, it allows regulators to make sweeping and often poorly informed ‘safety’ laws.
Another day in the crypto space.
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