Why is crypto crashing? The FTX Saga Explained

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Key learning points

  • After announcing a bailout from FTX, Binance has pulled out of the deal over concerns about their business practices and ongoing investigations from US regulators.
  • This comes even after rumors that the acquisition cost for FTX would be just $1, a staggering number given that Sam Bankman-Fried raised funding in January at a valuation of $32 billion.
  • The latest development has caused the crypto markets to tumble, with all major currencies dropping significantly in recent days.
  • For crypto investors brave enough to wade in, there are some very specific steps you should take to protect yourself as much as possible from the insane volatility.
ALSO READ  Why one asset manager avoided FTX before the storm: Bitwise Q&A

Stock market: “Wow, it’s been an insanely volatile year for us!”

cryptography: “Hold My Beer”

Yes that’s right crypto crashes again. And don’t crash after recovering, crash from the bottom of the previous crash. Bitcoin has hit its lowest price in nearly two years as the fallout from the FTX situation rumbles across the industry.

So what’s going on with this whole FTX thing and why is it causing the crypto market to collapse? We’ll explain, but keep in mind that this is a rapidly changing situation. Expect regular changes, but you can follow us here to keep up to date with all the latest crypto news.

This current price drop is happening as a direct result of the apparent collapse of one of the world’s largest crypto exchanges FTX. First, let’s cover up what happened and how FTX has gone from being the most blue chip of crypto companies to the brink of disaster.

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The Rise of FTX

Until now, FTX founder Sam Bankman-Fried (often simply referred to as SBF) and his company were considered crypto royalty. The company only started in 2019 with another major crypto exchange, Binance, one of their early investors.

It was great timing for SBF as his company experienced the pandemic crypto bull run, going from $0 in revenue to $1.2 billion in just two years. No valuation of $1.2 billion, $1.2 billion in revenue.

Just a few months ago, during their latest round of funding in January 2022, FTX was valued at $32 billion, with Paradigm raking in $400 million. Sam Bankman-Fried was the richest person in the world under the age of 30 with a personal wealth of $26.5 billion.

Along the way, they acquired 15 other companies in the crypto sector and tossed the money into a long list of sponsorships, including the NBA’s Miami Heat basketball arena, MLB umpire uniforms and F1 racing team Mercedes-AMG Petronas.

They also signed individual deals with names like Steph Curry, Tom Brady and Shohei Ohtani.

At the same time as turning FTX into a global crypto superpower, SBF grew its wealth even further by operating its own crypto hedge fund – Alameda Research.

All in all, Bankman-Fried and FTX have had some great years.

With the growth of FTX, Binance turned from a benevolent benefactor to a major competitor. Since Binance still had a large stack in FTX, they agreed to split for about $2 billion.

The catch was that Binance agreed to take a large chunk of the buyout proceeds in the form of FTT, FTX’s proprietary token that they use to fund trading fees on their platform.

This in itself was not a problem. FTX has largely been seen as one of the strongest names in crypto and SBF is considered a very safe pair of hands in an industry full of charlatans and scammers.

Unraveling FTX

That is, until Binance co-founder and CEO Changpeng Zhao (commonly referred to as “CZ”) announced on Twitter that SBF had made unsubstantiated claims about Binance to U.S. regulators, and as a result, they would pay their entire remaining $529. million in FTT.

As you might expect, the prospect of a massive market dump sent investors running for the exits, and the price of FTT collapsed. It almost immediately fell by more than 30% and caused a run on the platform, with huge delays and caps for investors trying to pull out.

All of this risk has been compounded by its relationship with Alameda Research, which has nearly $6 billion of its $14.6 billion total assets in FTT. Or at least it did, the value of those assets is: considerable now lower.

There are still many details about this relationship, but there are some concerns about a less-than-business relationship between the two companies, allowing Alameda Research to access real customer deposits in exchange for FTT deposits.

TL;DR – FTX looks like a house of cards about to collapse.

Enter CZ. As we reported yesterday, Binance stepped in and offered to acquire FTX to stabilize the market and save the company and their clients’ deposits.

Importantly, the offer was non-binding, meaning FTX had to open their books to Binance to poke around and see what they agreed to buy before committing fully to the deal.

It seemed that calm had returned and that another crisis in the sector had been averted. But it wasn’t.

Binance announced today that they are pulling out of the rescue FTX deal. The reasons they gave for the change of heart were concerns about her business practices, as well as ongoing investigations from US regulators.

Basically, Binance felt they were about to take possession of a live grenade, and they threw it back at the last minute.

The future is not certain for FTX, but it certainly doesn’t look good.

FTX drama causes crypto to crash

With all this drama, it is no shock that the crypto market has exploded. According to CoinDesk, Bitcoin hit a low of $15,710.72 yesterday, down more than 25% from late last week. This brings Bitcoin’s decline in the past year to nearly 70%.

Other major digital currencies have performed just as poorly, with Ethereum dropping 23% in the past five days and even Binance’s home currency BNB dropping more than 18% over the same period.

At the moment, we are still waiting for the full shakeout of the whole situation, but it is fair to say that this will probably cause shockwaves in the crypto sector for some time. The collapse of Terra, Three Arrows Capital, Celsius Network and Voyager Digital were all significant events, but they are nothing compared to the size and reach of FTX.

What does this mean for investors?

Once again we see a consistent reminder of crypto’s risks. When times are right, the gains can be phenomenal. When times are bad, losses can be too.

This underlines the need for sufficient diversification for those investors willing to take those risks. For individual investors who want to invest in crypto but want good diversification, we have created the AI-powered Crypto Kit.

This kit uses cryptocurrency trusts to gain diversification across a wide range of digital assets such as Bitcoin, Solana, Litecoin, Bitcoin Cash, 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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