Just as the investors were consolidating their positions in the cryptocurrency market, the news of Binance selling all its FTX tokens pulled the rug from under their feet. The total crypto market cap has fallen nearly $150 billion since the announcement on Tuesday with the FTX token, FTT, losing 75.85 per cent. FTX is the third largest crypto exchange in the world, and Binance is the largest.
Binance later announced that it was acquiring FTX but it failed to control the fall in crypto prices.
Bitcoin, the largest cryptocurrency by m-cap, was at its lowest level since November 2020 and has fallen over 10 per cent in the same period and Ethereum has plunged nearly 20 per cent. As of 4 PM (IST), Bitcoin was trading at $17,633 and Ethereum at $1,196, according to coinmarketcap. Other major tokens like Cardano, Dogecoin and Polygon were in the red.
“This reflects the state of crypto today. Cryptocurrency investors, especially the working class, are in deep fear since the currency was created solely to be used as collateral to raise funds. There are over a billion dollars in pending withdrawals on FTX,” Taaran Chanana, managing director & co-founder of tech platform MemeChat said.
During the day Bitcoin fell to nearly $17,000.
“Bitcoin fell to a year’s low of $17,100 with Binance’s takeover of Sam Bankman-Fried’s FTX imminent amidst worries of how FTX’s liquidity and solvency problems raised questions about the health of their balance sheet as they had repeatedly borrowed their own FTT token as collateral,” crypto trading platform CoinDCX’s research team told Business Standard.
What went wrong with FTX?
Bankman-Fried of FTX had become the face of the crypto industry. In 2017, he established Alameda Research, a venture capital firm specialising in digital assets. In 2019, he co-found FTX with backing from Binance.
In 2021, Binance announced that it was selling its share of FTX. However, after several rounds of funding, the exchange seemed to be gaining ground.
In August 2022, Alameda’s co-CEO Sam Trabucco resigned from his position. Shortly after, FTX president Brett Harrison announced his intention to stand down from his role.
In November 2022, CoinDesk reported that Alameda had $14.6 billion worth of assets but most of them were in the form of FTX’s own FTT tokens. Later, Binance received its share of $585 million from FTX in the form of FTT.
On November 7, as the withdrawals started rising, FTX reserves hit the lowest level in 52 weeks, spreading panic in the market. According to Bloomberg, tokens worth $1 billion were withdrawn in a single day.
On November 8, Binance announced that it will acquire FTX in a non-binding deal.
“I firmly believe bear markets are temporary, crypto is here to stay. The bear market could lead to maturity in the Crypto space. History shows that market movements are cyclical, which is to say, bull runs are often followed by corrections,” Ashish Singhal, co-founder and CEO of crypto exchange CoinSwitch said.
However, the crypto market is unlikely to reach the November 2021 level soon. In November last year, Bitcoin had touched $64,950 and the total crypto m-cap was close to $3 trillion. On Wednesday, the m-cap was $871.4 billion.
“It is highly unexpected, at least not for another 10 months. This will in turn cause greater fright amongst consumers and investors as a result of previous incidents like Luna Cash and now FTX,” Chanana added.
“It is unclear whether we will see the markets touch Nov 2021 levels anytime soon. As long as uncertainty persists, the market will remain range-bound and bearish,” Edul Patel, CEO and co-founder of trading platform Mudrex added.