Binance Acquires FTX in Emergency Aid

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Key learning points

  • After days of swirling rumors of a liquidity crisis at FTX, Binance has intervened at the last minute to acquire the company and save it from ruin.
  • This is because FTX’s proprietary token, FTT, has crashed 43% in recent days, putting Sam Bankman-Fried’s business under extreme pressure.
  • It is the last major shake-up of this crypto winter, with major layoffs across the industry.
  • For crypto investors, it highlights the importance of diversification. We have some great options for investors looking to get in at these current low prices.
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We’ve seen a series of high-profile foreclosures in the crypto space over the past year, and with crypto winter still freezing investors, FTX has been experiencing some serious problems in recent days.

As we have seen, the tides can turn very quickly in crypto land, with Voyager Digital and DeFi platform Celsius two of the most notable casualties in this crypto bear market.

With rumors of an FTX bankruptcy in recent days, one of their main competitors Binance has: agreed to save the company in a last minute buyout.

The news has shocked the markets: Bitcoin has fallen by more than 10% in recent days, Ethereum has fallen by a whopping 15% and FTX Token has crashed by 43%. These declines are from levels already very low since the crypto crash in late 2021.

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The FTX rumor mill is running at full speed

With crypto winter well and truly here, there are constant concerns about various projects and companies in the space. It’s especially noteworthy now, as the recent bull market saw billions of dollars of investment and venture capital money flowing into crypto and Web3.

Many of these companies have grown incredibly fast, and even the best-funded are struggling to control their cash flow.

Layoffs in the industry are rife, with Coinbase, Crypto.com, BlockFi, OpenSe Gemini, and Bitpanda. Crypto.com has been in the news again recently, with their original layoffs undermining the problems within the company. This second round means they have now reduced their workforce by 30-40%.

In terms of FTX, one of the main reasons for the rumors was the selling pressure experienced by their own token FTX Token (FTT). It has lost nearly half its value in recent days, in price action reminding investors of Terra’s recent collapse.

This selling pressure increased when Binance chief executive Zhao Changpen announced on Twitter that the company would divest its entire $529 million stake in FTT.

The same Tweet stated that one of the main reasons for Binance to completely dump their FTT position was due to “recent revelations”. This refers to a CoinDesk story highlighting the relationship between the FTX exchange and founder and CEO Sam Bankman-Fried’s hedge fund Alameda Research.

It has come to light that Alamada Research’s balance sheet is heavily weighted towards FTT. Of the total assets, $14.6 billion, of which $3.66 billion is “unlocked FTT” with an additional $2.16 billion in “FTT collateral”.

Only $134 million of the $14.6 billion assets is held in cash.

The problem with a position like this is concentration risk. By holding such a large position, FTX is able to artificially constrain the circulating supply and thereby support the price. Despite this, such a large holding means that the financial health of the entire company is strongly tied to the strength of FTT.

With intense selling pressure and a large institutional holder wanting to get out, this puts FTT, and by extension, FTX and Alameda Research at great risk.

The parallels between FTX and Celsius

Some analysts have drawn parallels to the situation with the recently bankrupt Celsius Network. Celsius created their own token, CEL, and kept much of it on their balance sheet.

Then, by increasing the price of the token, it also increases the valuation of the company that owns a significant portion of it. This is fine as long as the market for the coin or token continues, but as we have now seen in many cases, this price action is very difficult to sustain.

As the token’s value begins to correct, the company is under pressure from outside lenders and stakeholders who had jumped in bed with the company based on the inflated valuation. Slowly, the house of cards begins to collapse, with the unraveling accelerating as the selling pressure mounts.

Binance steps in to save FTX

While executives at FTX seemed to brush off concerns in recent days, Zhao Changpen took to Twitter again to announce that Binance has agreed to bail out FTX and avoid the (obviously inevitable) liquidity crisis.

The terms of the deal are yet to be worked out, suggesting guarantees were needed to satisfy lenders or third parties and prevent a total collapse of the company, such as Terra or Three Arrows Capital.

At present, the position of Alameda Research is uncertain.

What this means for investors

This highlights the high level of risk within the crypto sector, but also reminds us of the importance of diversification. Even the largest institutions are not immune to concentration risks, with FTX, Alameda Research and Celsius Network being textbook examples of the dangers of a poorly weighted balance sheet.

The same goes for individual investors. For those who want to invest in crypto but want maximum diversification, we created the AI-powered Crypto Kit.

This kit uses cryptocurrency trusts to gain diversification across a wide range of digital assets such as Bitcoin, Cardano, Bitcoin, Solana, and Chainlink. It allows you to manage your crypto alongside your regular stocks, all in one portfolio.

In fact, by using our AI portfolio, you can let our AI predict your best risk-adjusted mix for the week ahead and then automatically adjust the amount you have in crypto and your other investments.

It’s like a hedge fund in your pocket and we’ve made it available to everyone.

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