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Cryptoverse in turmoil after FTX Failure

Global crypto markets are reeling at massive price slumps after a shock bailout of the dominant FTX exchange.

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The news saw the price of crypto currencies crash on Tuesday, with Bitcoin touching a two year low in the biggest upheaval since the ‘crypto winter’ started in May.

The world’s two biggest crypto exchanges in the world, Binance and FTX, produced an unexpected merger announcement of their non-US businesses in a bid to fix the latest “liquidity crunch.”

The deal was completely unexpected and was a shock because FTX had been pitching itself as the steadying influence during the winter, buying struggling or failed rivals in an attempt to stabilise the crypto sector.

The news, and explanation – FTX sought a bailout from Binance which was also a shock – saw Bitcoin prices slump 13% to around $US18,064.00, according to Coin Metrics. Earlier it fell to $US17,300.80, its lowest level since November 2020. The price of Ether also fell, losing 18% to $US1,334.98. It fell as low as $US1,228.89 earlier in the day.

The meltdown sparked fears of a repeat of the crypto market’s dramatic crash earlier this year, which saw the failures of the Terra blockchain’s UST stablecoin, the crypto lender Celsius, trading venue Voyager and the investment fund Three Arrows Capital, and then dozens of smaller players many of which were ‘rescued’ by FTX.

CNBC reported that smaller crypto assets and tokens tied to Alameda, the trading company also owned by FTX’s Sam Bankman-Fried, suffered bigger losses. FTX Token – the native token of the FTX trading platform, fell 76.5%. The token tied to Ethereum competitor Solana, of which Alameda is a big backer, lost 28.4%.

In crypto equities, Coinbase slid 11%, and Robinhood, which Bankman-Fried has a 7.6% stake in, slumped by 14.5%. Crypto banks like Silvergate and Signature and bitcoin miners like Hut 8 and Riot Blockchain were down double-digit percentages, according to CNBC.

The falls came hard on the heels of the shock announcement on Twitter by Bankman-Fried, (FTX’s CEO) that the company has agreed to a sale for an undisclosed sum to Binance. Binance CEO Changpeng Zhao confirmed the deal minutes later on Twitter.

The deal will affect the non-US businesses of FTX and Binance. The US. arms of each company, Binance US and FTX US, are separate and will be unaffected by the news, Bankman-Fried, said in his tweets. The deal has not closed and the companies have more due diligence to do, the two CEOs said.

The deal means FTX has joined the growing list of failures or near collapses by a strong of former high flying crypto players which have included multibillion failures Celsius and Three Arrows.

CNBC reported that investor confidence has been shaken after Binance founder Changpeng Zhao who 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 (The FTX token) and BUSD, the fiat-backed stablecoin issued by Binance and Paxos, combined.

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

Those revelations refer to rumours 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 disputed that claim, saying FTT represents only part of its total balance sheet but Tuesday’s news shows no one was listening and decided that FTX was a crash that was happening and bailed.

“The Alameda hedge fund is tied to FTX through a ton of FTT tokens and the rumours 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 in a comment on CNBC.

“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.”

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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