The entire crypto market plummeted following Binance CEO Changpeng “CZ” Zhao’s announcement that he would acquire FTX.
A significant loss happened to the FTX native token FTT. Despite trading at around $22 per unit on Monday, its price plunged under $5 per unit on Tuesday afternoon, which caused the token to lose more than $2 billion in market valuation within a day.
Bitcoin and Ether’s prices also dropped by more than ten percent. Bitcoin reached $17,603 per unit, one of its lowest points since June. Meanwhile, Ether’s price went down to $1,318.
Shares in crypto exchanges also plummeted, including the infamous trading platform Coinbase Global (COIN), which concluded the trading day 11 percent lower. Robinhood's shares also plunged 19.3 percent.
Affected by the news of Binance's acquisition of FTX, BNB rose to $370, an increase of 12% in one hour; FTT rose to a maximum of $22, an increase of 37% in one hour. BTC bounces back to $20,143 and ETH to $1,535.
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Huge drop in crypto market
Castle Island Ventures partner Nic Carter described the acquisition as “the most dramatic deal” in the history of crypto.
“It consolidates basically the two largest offshore exchanges into one entity, an absolute coup for CZ and Binance — and really a disaster for FTX,” he continued.
According to Carter, FTX CEO Sam Bankman-Fried’s willingness to enter an agreement with Binance showed that the exchange’s internal situation was “deeply impaired.” Analysts claimed that the issue was caused by FTX offering bad loans or making investments with user deposits. CZ dubbed the problem a “liquidity crunch.”
The agreement between Binance and FTX is nonbinding and will not affect FTX’s businesses in the U.S. However, its non-U.S. businesses account for 95 percent of its total revenue. The value of the exchange was $32 billion earlier this year.
Analysts added that the agreement between Binance and FTX could negatively impact the entire crypto industry, especially companies that relied on trading as their main source of revenue. Mizuho Securities analyst Dan Dolev said it illustrated “how fickle the crypto industry could be.”
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
Binance was involved in a strategic investment within FTX in 2019 before pulling out in 2021. CZ revealed that Binance held $2.1 billion in FTT and BUSD following its exit from FTX last year.
FTX freezes withdrawals
FTX froze withdrawals from its platforms on Tuesday after investors tried to pull out their funds. This strategy had been used by other defunct crypto companies like Celsius and Voyager Digital.
Investors started pulling out their funds from FTX last week following news of a leaked balance sheet of Alameda Research, a sister company of FTX. It revealed that most of its assets are tied to FTT, with the token being collateral to Alameda, causing caused a potential liquidity issue for both sister companies.
After the news, CZ caused a stir within the crypto community when he announced plans to liquidate the remaining FTT tokens Binance kept in its holdings, but it claimed that it was not an attempt to pressure FTX.
4) A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world.
— SBF (@SBF_FTX) November 8, 2022
Nevertheless, the plunge in the price of FTT could lead to a more severe impact, as explained by Arca's chief investment officer, Jeff Dorman.
“If the price of FTT goes way down, then Alameda could face margin calls and all kinds of pressure,” Dorman said. “If FTX is the lender to Alameda then everyone’s going to be in trouble.”
Alameda has since denied the news, saying that the balance sheet does not represent all of its assets. FTX refused to comment on the liquidity issue the company faces.