Cryptocurrencies, including Bitcoin, Ethereum, Polygon, are witnessing massive sell-offs with some declining by as much as 16 per cent within 24 hours. The cryptos are falling due to the financial crisis at a major crypto exchange FTX and the situation was further aggravated following the disintegration of the Binance-FTX rescue deal.
What Is The Issue?
The drop in cryptos started earlier this week when crypto exchange FTX struggled with financial issues. FTX, which is among the top-five crypto exchanges in the world, is facing a liquidity crisis and its CEO Sam Bankman-Fried (also known as SBF) has told investors that the company is facing a shortfall of up to $8 billion from withdrawal requests and needs emergency funding, according to The Wall Street Journal.
FTX CEO Sam Bankman-Fried on Wednesday said that without a cash injection, bankruptcy is likely. On the November 7 night, amid the liquidity crunch, Bankman-Fried was scrambling to raise money from venture capitalists and other investors. FTX was was earlier this year valued at $32 billion by private investors.
There are reports about mishandled customer funds also. The US Department of Justice will launch a probe into FTX.
The Failure Of Binance-FTX Deal
As FTX CEO Bankman-Fried was approaching investors for raising funds, he also went to Binance, which is already a significant investor in FTX. Binance CEO Changpeng Zhao (also known as CZ) then agreed on the rescue and announced that he had reached a non-binding deal to buy FTX’s non-US businesses for an undisclosed amount.
However, a day after the announcement, the Binance CEO took a U-turn and said “the issues are beyond our control or ability to help”. This reversal jolted the cryptocurrency market as it pointed toward the uncertainty in the crypto world.
Binance in its statement on Wednesday said, “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com. In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
Binance’s Changpeng Zhao has also publicly said he would sell his holdings in FTX, which has rattled the company’s crypto token FTT falling as much as 80 per cent of its value between Monday and Tuesday to $5 and wiping out more than $2 billion in a day.
FTX and Binance Journey Together
Binance invested in FTX in 2019 when the latter was a derivatives exchange. The following year, in 2020, Binance launched its own crypto derivatives and then later became the leader in the segment.
Problems started after the two companies were caught up in regulatory issues. Bankman-Fried was testifying in the US Congress, while Binance was said to be facing regulatory probes around the world.
CZ and SBF have been trading barbs on Twitter for months, feuding over issues ranging from lobbying US politicians to allegations of frontrunning trades.
Where Is The Crisis Headed?
The liquidity crisis has created solvency risk for FTX. FTX CEO Sam Bankman-Fried on Wednesday said that without a cash injection, bankruptcy is likely.
Sequoia Capital has marked down its investment to $0. In a statement on Thursday, it said, “The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0.”
It said Sequoia Capital’s exposure to FTX is limited. “We are in the business of taking risk… At the time of our investment in FTX, we ran a rigorous diligence process. In 2021, the year of our investment, FTX generated approximately $1 billion in revenue and more than $250 million in operating income, as was made public in August 2022.”
The Sell-Off In Cryptocurrencies
Bitcoin was down about 16 per cent amid the fiasco, while Ethereum and XRP were down 12 per cent. Polygon was trading lower by about 7 per cent. Ether also declined about 13 per cent.
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