The last 2-3 days were nothing short of a high-adrenaline, horror-packed movie for the crypto world.
There was a silent cold war in the crypto space for a long time, but nevertheless, the world’s no. 1 and no. 2 crypto players – Binance and FTX, didn’t go after each other with knives and maintained a frenemy relationship for years. Until this week.
Where Did It All Start?
It all started when Sam Bankman-Fried, the CEO of FTX, took a shot at CZ Binance, the CEO of Binance. In a now-deleted tweet, Sam Bankman-Fried said, “excited to see him repping the industry in DC going forward! uh, he is allowed to go to DC, right?” and that kickstarted the billion-dollar chain of events.
A few days later, CZ Binance tweeted that as part of its exit strategy from FTX equity, which it began last year, Binance will liquidate its remaining FTT holdings.
Although CZ did not specify how many FTT coins Binance will sell, as part of their exit from FTX, they had $2.1 billion in BUSD and FTT, and CZ stated clearly that he intended to liquidate all of the FTT coins still held on their books. Such a massive liquidation was enough to send shockwaves through the market and throw it into chaos.
Alameda’s Rescue Plan
The same day, Caroline, Alameda’s CEO, replied to CZ, saying that her Alameda Research is prepared and willing to buy all of the remaining FTT coins held by Binance at $22 in a back-channel transaction that does not impact the market.
However, CZ publicly stated that he wanted to sell in the open market. Such Twitter dialogues quickly stirred up conflicting feelings in the crypto space, resulting in high price volatility of the FTT token, which CZ probably wanted.
Amid the back-and-forth dialogues, rumors concerning Alameda Research’s financial stability spread like wildfire over the firm’s leaked balance sheet.
What Was Wrong With Alameda?
According to a leaked balance sheet, Alameda had $14.6 billion in assets, $8 billion in liabilities, and $7.4 billion in undefined loans.
The math simply didn’t add up, and out of those alleged assets, $5.8 billion of them were illiquid FTT tokens included.
The CEO, Caroline, stated that her company had more assets worth $10 billion that aren’t shown on the leaked balance sheet.
Still, out of concern that another crash like LUNA or insolvency like Celsius would happen, users quickly rushed to withdraw funds from FTX.
The Bank Run
By the end of the day, the chaos was so massive FTX witnessed more than $6 billion of withdrawals in 72 hours, as reported by Reuters. As FTX was trying to fill the orders, they knew they were heading towards a bank run – an event when large groups of depositors simultaneously withdrew their money from banks based on fears that the institution would become insolvent.
Reportedly, FTX halted all the withdrawals from the platform.
On the other side, FTX’s native token, FTT, was dropping like a Boeing 737 MAX from the sky due to recent events. After the withdrawals were halted, speculations were hitting the roof, and the token fell further. Roughly two days ago, it was hovering around $22, and at the time of writing this article, it was standing at $4.29, resulting in a loss of 80% to investors.
FTX Has No Friends?
FTX was so running out of cash it was reported that Sam Bankman-Fried, CEO of FTX, reached out to everyone he could, seeking $1 Billion to rescue FTX and fill the withdrawals. By mid-Tuesday, the gap in their balance sheet went significantly deeper, and simply they could not secure sufficient funds.
After a couple of hours, the unprecedented happened – CZ tweeted that Binance had signed an LOI to acquire FTX and cover the liquidity crunch fully. In a matter of days, FTX went from being no. 2 in the world to being sold to its biggest competitor.
Sam Bankman-Fried, in an effort to protect customers and process all the withdrawals, asked for Binance’s help, and let’s be fair – what was his other option? Stop the withdrawals permanently, let FTX become the next Celsius, and collapse the industry.
He did the right thing for the sake of everyone, but a few questions still remain unanswered.
Personally, I do feel CZ Binance started this by gaslighting his biggest competitor by publicly announcing that he will be selling their token in the open market, which obviously would cause selling pressure and a liquidity crunch.
Conveniently, Alameda’s balance sheet was leaked when it offered to buy the FTT tokens privately.
And as everyone, especially CZ, expected, the chain of events eventually sucked the liquidity out of FTX. It made them look like Celsius, causing a huge cry on the market and making Sam Bankman-Fried and FTX beg for mercy.
But then, a few more things remained unanswered. Why did nobody come to FTX’s rescue? Do they know something we don’t? And why did FTX even have to be rescued when they saved other companies like Voyager a few months ago?
It is understandable when a Hedge Fund like Three Arrows Capital goes insolvent, but an exchange like FTX is not supposed to run out of capital. Does that mean they secretly lent funds to Alameda Research behind the scenes for trading?
What are Crypto Pundits Saying?
In a conversation with me, Karthikeya Gutta, LinkedIn Top Voice 2022, also sheds some light, “No matter what you say, the fact that the saviour of Voyager had to be saved, it highlights that something massive was happening behind the scenes – something way bigger than Celsius and LUNA”.
He further added, “Imagine if nobody was willing to help them in this situation, there must be a bigger hole in the balance sheet that they were claiming – so big that the only player who could absorb so much was only Binance”.
If that is indeed the case, it could be bigger than the Celsius disaster because directly or indirectly, many ecosystems and institutions are connected with FTX and Alameda – and Binance’s deal is yet to be completed and is it only for FTX and ‘not’ Alameda.
If this turns out to be anything like Celsius, 3AC, or Luna, it could push the industry back by many years. For now, we can only wait and watch.
Nevertheless, this saga also teaches us a lesson, as highlighted by Vaibhav Gupta of DesiCrypto, “No exchange should be putting their token as collateral to avoid such scenarios. Although people are saying CZ is showing his power play, the focus right now should be on transparency!”
Coinbase CEO Brian Armstrong took to Twitter, sharing his “sympathy for everyone involved in the current situation with FTX.”
Kunal Shah of CRED also tweeted a cryptic quote, “When you strike at a king, you must kill him”, probably hinting at Sam Bankman-Fried when he took a jab at CZ.