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Binance To Acquire FTX In Emergency Bailout

Key Takeaways

  • After days of swirling rumors about a liquidity crisis at FTX, Binance has stepped in at the last minute to acquire the company and save it from collapse.
  • This comes as FTX’s own token, FTT, has crashed 43% in recent days, putting the Sam Bankman-Fried’s company under extreme pressure.
  • It’s the latest major shakeup this crypto winter, with major layoffs across the entire industry.
  • For crypto investors it highlights the importance of diversification. We’ve got some great options for investors who want to get in at these current depressed prices.

We’ve seen a string of high profile bankruptcies in the crypto space over the past year, and with crypto winter still freezing out investors, FTX has looked in some serious trouble over the last few days.

As we’ve seen, tides can change very quickly in crypto land, with Voyager Digital and DeFi platform Celsius two of the most high profile casualties in this crypto bear market.

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

The news has spooked the markets with Bitcoin down over 10% over the past few days, Ethereum down as much as 15% and FTX Token crashing 43%. These falls are from levels that are already very low since crypto’s crash at the end of 2021.

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The FTX rumor mill goes into overdrive

With crypto winter well and truly here, there are constant concerns over various projects and businesses in the space. It’s particularly noteworthy now, given that the recent bull market saw billions of dollars of investment and venture capital money pour into crypto and Web3.

Many of these companies have grown incredibly quickly, and even the most well-funded have struggled to get their cash flow under control.

Layoffs in the industry have been widespread, with Coinbase, Crypto.com, BlockFi, OpenSe Gemini and Bitpanda. Crypto.com has been in the news again recently, with their original round of layoffs underselling the problems within the company. This second round means they’ve now cut their workforce by 30 – 40%.

In terms of FTX, one of the key reasons for the rumors had been the selling pressure being experienced by their own token FTX Token (FTT). It has lost almost half its value over the past few days, in price action that reminds investors of the recent collapse of Terra.

This selling pressure intensified as Binance chief executive Zhao Changpen announced on Twitter that the company would be offloading its entire $529 million stake of FTT.

The same Tweet stated that one of the key reasons for Binance dumping their FTT position entirely was due to ‘recent revelations’. This is in reference to a CoinDesk story which highlighted 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 number $14.6 billion, $3.66 billion of that is “unlocked FTT” with a further $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 the concentration risk. By holding such a large position, FTX are able to artificially limit the circulating supply and therefore support the price. Despite this, such a large holding means the financial health of the entire company is heavily linked to the strength of FTT.

With intense selling pressure and a major institutional holder looking to get out, this puts FTT in severe danger, and by extension, FTX and Alameda Research.

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 held a huge amount of it on their balance sheet.

By then pumping the token’s price, it also inflates the valuation of the company which holds a significant amount of it. This is fine as long as the market for the coin or token continues, but as we’ve now seen in many cases, this price action is very hard to sustain.

As the value of the token starts to correct, the company is put under pressure by external lenders and stakeholders who’d jumped into bed with the company based on the inflated valuation. Slowly the house of cards starts to fall, with the unraveling picking up speed as the selling pressure worsens.

Binance steps in to save FTX

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

The terms of the deal are yet to be hashed out, which suggests that assurances were needed to satisfy lenders or third parties and prevent an all out collapse of the company to mirror Terra or Three Arrows Capital.

As of right now, 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 serves as a reminder of the importance of diversification. Even the largest institutions aren’t immune from concentration risk, with FTX, Alameda Research and Celsius Network 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 utilizes cryptocurrency trusts to gain diversification across a wide range of digital assets such as Bitcoin, Cardano, Bitcoin, Solana and Chainlink. This allows you to manage your crypto alongside your mainstream stocks all in a single portfolio.

Better still, by using our AI portfolio you can let our AI predict your best risk-adjusted mix for the coming week, 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 for everyone.

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