Binance, a cryptocurrency exchange, apparently changed its mind about rescuing FTX on Wednesday, throwing the future of the significant digital firm in doubt as it faces a shortfall of up to $8 billion. After considering the offer’s potential impact on the company’s finances, Binance decided against accepting the nonbinding proposal.
Founder and CEO Sam Bankman-Fried reportedly told FTX investors on a teleconference on Wednesday that he needs immediate capital due to a surge in customer withdrawal requests over the past few days. Their demands precipitated a severe shortage of cash flow.
FTX’s Next Move
According to those in the know, FTX has been talking to investors about raising up to $4 billion in equity to cover the shortfall. Financial markets were already unsettled by uncertainty about the result of the U.S. midterm elections when the Binance rescue deal imploded. On Wednesday, the Nasdaq dropped by around 2.5%, the Dow Jones Industrial Average fell by about 2%, and the S&P 500 dropped by about 2%.
The largest and most well-known cryptocurrency, Bitcoin, had a drop of roughly 16%, taking its value to below $16,000 for the first time since November 2020. From its all-time peak in November of 2021, it has now dropped by over 75%.
Also on Wednesday, Gary Gensler, chairman of the Securities and Exchange Commission, issued a strong warning to crypto platforms after openly encouraging them to register with his agency for over a year. Moreover, he compared the entire cryptocurrency market to a Jenga stack that crumbles with each successive fall.
Once a brilliant survivor in a faltering industry, FTX’s demise has sent shock waves through the cryptocurrency market. Mr. Bankman-Fried, who only a few short months ago pledged nearly a billion dollars to bail out struggling cryptocurrency lenders, has become a prominent lobbyist and is widely regarded as the face of crypto in Washington.
Since Binance has abandoned FTX, the future of the exchange is uncertain, and the root of and extent of its financial woes are also unknown. FTX said they had nothing to add.
Not only do the company and its CEO, Mr. Bankman-Fried, stand to lose a lot of money, but so do a number of prestigious financial institutions who have staked money in the exchange. SoftBank Group Corp., Sequoia Capital, the Third Point Hedge Fund, and the tech-focused Thoma Bravo Private Equity were among the investors in a $900 million financing round last year..
The risk of loss exists even for individual traders. According to a pinned message in the FTX official Telegram channel, the exchange has temporarily suspended the withdrawal of both digital and fiat currency.
Trader Michael Tursk from Europe claims he has been unable to withdraw his roughly $11,000 from FTX since lunchtime on Wednesday. According to him, such sums amounted to roughly 70% of his liquid net worth.
Companies outside of FTX also suffered losses. Shares of publicly traded corporations having ties to cryptocurrencies, either because of their holdings of cryptocurrencies or because of the fees they generate from trading cryptocurrencies, were dumped by investors.
Despite the company’s CEO assuring investors on Twitter that Coinbase Global Inc. has adequate assets for customer withdrawals and no meaningful exposure to FTX, the stock price of Coinbase Global Inc. plummeted by over 10%. Since going public last year at a valuation of $85 billion, Coinbase has closed at its lowest point. On Wednesday, it had a market cap of roughly $10 billion.
Silvergate Capital Corp. (SGCC), the most closely located U.S. bank in the cryptocurrency industry, saw a 12% drop in share price yesterday, bringing its yearly loss to over 75%. MicroStrategy Inc.’s stock price dropped by over 20% after the company announced it was shifting focus from business software to acting as a buy-and-hold vehicle for bitcoin.
Trading platform When Mr. Bankman-Fried, a major investor in Robinhood Markets Inc. (which allows trading in more than just cryptocurrency), expressed concern that he could have to sell his shares, the company took a hit. The stock price of Robinhood fell about 14% on Wednesday, increasing its weekly loss to over 30%.
Speculations and Possibilities
Some crypto holders and investors have speculated that ties between FTX and a similar company, Hong Kong crypto-trading firm Alameda Research, may have contributed to the crisis, but this has yet to be proven. Mr. Bankman-Fried created both FTX and Alameda, and he owns a majority stake in both companies.
Last week, a report from CoinDesk suggested that a large portion of Alameda’s assets were denominated in FTT, a cryptocurrency developed by FTX. This led to an increase in speculation regarding the nature and scope of the financial ties between FTX and Alameda.
Like their regulated counterparts, cryptocurrency exchanges need a variety of partners to supply tradable digital assets like bitcoin and ether. There are those who help buyers and sellers called “market makers.” A commission is the difference between the highest bid and the lowest acceptable offer.
There were governance concerns and the possibility of conflicts of interest due to the close relationship between the exchange and the market maker. A market maker with these ties may, in theory, utilize the exchange to artificially raise or deflate the price of an asset.
For stocks and futures to function properly in the more conventional financial markets, exchanges must be unbiased. They are strongly discouraged from forming partnerships with financial institutions. However, in the mostly unregulated crypto space, such restrictions do not exist.
While Alameda’s primary function was as a market maker, the two companies also had other connections. The FTT tokens issued by FTX were used as collateral for loans the company obtained from other cryptocurrency lenders, as stated by those with knowledge of the situation.
The value of FTT plunged 90% or more in the days following the CoinDesk article. An earlier statement by Mr. Bankman-Fried to the Journal in February disproved the notion that Alameda was affiliated with FTX. He said that none of FTX’s market makers had access to any nonpublic market data.
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