After a particularly tumultuous week in which Binance and FTX literally shook the future of crypto, we look back and forward. What exactly is going on and what can we expect next?
Crypto in turmoil due to power struggle Binance and FTX
Binance with top executive CZ and FTX (a rival crypto exchange) with top executive Sam Bankman-Fried at the helm played leading roles in a power struggle that rocked the crypto market last week. Besides personal tensions between former friends CZ and Bankman-Fried, the trigger lay with figures published by crypto-trading company Alameda. Namely, they appeared to hold large amounts of the FTX token (belonging to the exchange). This raised 2 questions.
The first question was how stable Alameda’s position was (still). Indeed, the balance sheet listed $14.6 billion in assets, but most of it was tied up in FTX tokens and derivatives. Moreover, some of the holdings in FTX were also blocked.
This raised the following question: how solid is the price of FTX and to what extent is it still determined by the free market when a substantial amount of tokens is owned by one party. On top of that, Binance is another whale in FTX tokens.
Binance and Alameda put bomb under crypto
On November 6, CZ announced via Twitter on behalf of Binance that it wanted to sell all of its FTX tokens. To this, Alameda responded that it wanted to buy up all its stock for $22 per coin. This was a red flag for investors, as the FTX price was higher at the time.
Twitter is not loading because you did not give permission.
@cz_binance if you’re looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!
– Caroline (@carolinecapital) November 6, 2022
So investors saw: 1.) the threat of a huge supply coming into the market. 2.) A large investor who bid below the market price and thus went “short. This caused a wave of selling of the FTX token and thus pressure on the eponymous exchange. This pressure became so great that there was not enough in cash to meet all the payouts and a withdrawal halt was declared. This caused a further wave of selling.
The selling already made sentiment bearish, but the prospect of investors losing their investment en masse created even more negative sentiment.
Binance throws crypto market into turmoil
Then CZ came back into the picture and shared the intention to buy the entire crypto exchange FTX under the condition of a book review. Again, the market reacted in a divided way. The positive side was that a solution to FTX’s non-liquidity was shining through and investors would still see a return on their investment. On the other hand, there was criticism. After all, Binance had had a hand in FTX’s loss of liquidity by announcing the dump of their FTX tokens.
They did not have to devote much time to the discussion, as on Thursday evening CZ announced, again via Twitter, that Binance was abandoning the acquisition. Partly based on rumors of problems within FTX and partly because they were afraid that authorities in Europe and America would block the acquisition because their market share would become too large.
Of course, this in turn created negative sentiment in crypto. However, after Binance dropped out, other investors stood up to take over FTX. Among them Singaporean shareholder Temasek and the Tron foundation.
What can we expect in the crypto market?
Meanwhile, in a series of tweets, Sam Bankman-Fried has apologized and explained that crypto investors outside America were particularly affected. He indicates that negotiations for an acquisition continue and that he will use the proceeds to compensate duped investors. This reportedly requires $8 billion, but whether SBF will have a chance to raise it quickly remains to be seen. Indeed, according to the latest rumors, he has been arrested in the Bahamas. Incidentally, FTX announced earlier this morning that they will quickly restore the ability to list Ethereum (ETH) and Polygon (MATIC).
Looking at the live prices of Bitcoin and other crypto we see rising prices and that would mean that confidence is slowly returning to the market.
Still, analysts expect this week’s events to reverberate longer term. On the one hand, because once again it has been proven that liquidity (or lack thereof) and (de)centralization need much more attention in risk management when investing and trading in crypto. On the other hand, the question of whether Binance is indeed guilty of market manipulation will undoubtedly be on the minds of the regulatory authorities who are busy developing crypto laws in America and Europe. The regulators such as DNB that Binance hopes to become friends with are also expected to look at the applications with extra scrutiny.
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Note: We never give financial advice, so you can’t interpret our contributions that way either. Always do your own research and decide on rational grounds if, when, what and how much you want to invest.
Sources: Bitcoin Magazine, Crypto Newsflash and Coinmarketcap.com.