Bitcoin briefly touches new low for the year, FTX token plunges over 75% in broad crypto selloff

The cryptocurrency market fell on Tuesday after Binance and FTX, the two largest crypto exchanges in the world, agreed to merge to deal with what Binance called a “liquidity crisis”.

Bitcoin fell 12.6% to $18,203, according to Coin Metrics. Earlier today, it fell to $17,300.80, its lowest level since November 2020. Ether plunged 18.2% to $1,311.50, after falling as low as $1,228.89.

These declines spilled over into the rest of the market, at one point even stealing steam from the stock market rally. Smaller crypto assets tied to Alameda, the trading company also owned by FTX chief executive Sam Bankman-Fried, suffered some of the biggest losses. FTX Token (FTT), the native token of the FTX trading platform, plunged 76.4%. The token tied to popular Ethereum competitor Solanaof which Alameda is a big backer, lost 26.4%.

In crypto stocks, Coinbase slid 10.8% and Robinhood, which also has a crypto trading business and in which Bankman-Fried has a 7.6% stake, lost 19%. Other crypto-related stocks, including crypto banks Silvergate and Signature and bitcoin miners Hut 8 and Riot Blockchain, also lost ground.

The moves came after Bankman-Fried announced on Twitter that Binance will buy FTX’s non-US business for an undisclosed amount. Changpeng Zhao, CEO of Binance confirmed the news minutes later.

The deal will only affect the non-US businesses of FTX and Binance. Each company’s US arms, Binance US and FTX US, are unaffected, Bankman-Fried, also known as SBF, said in his tweets. The deal hasn’t been done and the companies have more due diligence to do, the CEOs said.

The crypto market slipped in early trading as investor concerns over FTX’s solvency swirled following recent rumors surrounding the exchange and its sister company, Alameda Research. The market briefly rebounded after the deal closed.

“There are many mirrors Celsius and the Three Arrows Crisis this happened months ago and what you see are investors who have seen it before and are afraid to run away in the markets,” said Conor Ryder, research analyst at Kaiko.

A rumor that triggered a “bank run”

Investor confidence was shaken after 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 frightened investors attempted to withdraw their funds en masse.

Zhao said in his tweet that Binance has approximately $2.1 billion combined in FTT and BUSD, the fiat-backed stablecoin issued by Binance and Paxos.

“Due to recent revelations that have come to light, we have decided to liquidate any remaining TTFs on our books,” Zhao said.

This referred to rumors about the solvency of FTX, the world’s third-largest crypto exchange by trading volume. A CoinDesk report Alameda’s financial statement last week showed that much of its balance sheet is concentrated in FTT, and some of its various businesses are operated using FTT as collateral. Alameda disputed this claim, saying that FTT only represents a portion of its total balance sheet.

“Hedge fund Alameda is tied to FTX through a ton of FTT tokens, and rumors started that if they’re using all those FTT tokens as collateral…there are two issues,” said Jeff Dorman, Chief Investment Officer at Arca. . “If FTT’s price drops significantly, then Alameda could face margin calls and all kinds of pressure; two, if FTX is Alameda’s lender, everyone will be in trouble.”

“What could have been an isolated problem at Alameda has become a bank run,” he added. “Everyone has started pulling their assets out of FTX, and there’s this fear that FTX will be insolvent.”

A “black eye for trust”

Ryder said industry watchers were “generally” confident that FTX and its customers would “be fine,” but the panic was understandable. By Tuesday morning’s close, Bankman-Fried had said little on the issue that would have calmed shaken investors.

“The problem is the opaque nature and the lack of transparency about FTX reserves, Alameda reserves, the ties between the two — no one really knows how closely the two are related,” Ryder said. “From that side of things, it reflects a lot of Celsius’ issues in that we don’t have any fund transparency, and FTX hasn’t come out and reassured investors, so that’s what we now see fleeing in the markets.”

That’s a good argument for more regulation of centralized entities, Ryder added, saying it’s imperative for all centralized entities – whether it’s hedge funds such as Three Arrows Capital or Alameda Research or centralized exchanges such as FTX and Binance that are not publicly traded – to retain proof of reserves for the sake of investor protection.

Dorman echoed Ryder’s sentiment, saying while this may, at best, be a short-term liquidity issue for the market, it’s “another black eye for confidence.”

“Do they put [the reserves] in a bank account? Are they using them to lend?” Dorman said. “That’s where the lack of transparency comes in: something that probably isn’t a problem and shouldn’t be a problem becomes a liquidity problem at term if FTX cannot immediately process all withdrawals.”