The Tron Protocol may be the next to step in and help solve the deepening crisis for FTX. Founder of crypto token Tron Justin Sun tweeted he was ready to provide billions in aid to FTX, Bloomberg reported Friday.
The fourth largest crypto exchange by trade volume, FTX.com will need to file for bankruptcy unless it can secure a cash injection to fill an $8 billion shortfall, Bloomberg reported yesterday. FTX received more than $6 billion in withdraw requests over 72 hours earlier this week. CEO Sam Bankman-Fried apologized for the upheaval in a Twitter thread early Thursday.
SBF Apologizes
"I'm sorry. That's the biggest thing. I f**ked up, and should have done better," Bankman-Fried tweeted. He offered a rough update on where things stand for FTX International. "FTX US USERS ARE FINE!" he added. FTX International currently has a total market value of assets and collateral that's higher than client deposits, SBF said, "but that's different from liquidity for delivery."
He takes responsibility for "poor internal labeling of bank-related accounts," which meant "that I was substantially off on my sense of users' margin." Before, he assumed 0 leverage with enough USD liquidity to deliver 24 times the average daily withdrawals. In reality, leverage stood at 1.7x and once the run on FTX accounts began, there was only enough liquidity to cover 80% of the $5 billion withdrawn on Sunday.
Bankman-Fried says "doing right by users" is his top priority right now. And FTX is doing everything it can to raise liquidity this week. "There are a number of players who we are in talks with, LOIs, term sheets, etc.," he said.
"Every penny of that - and all the existing collateral - will go straight to users, unless or until we've done right by them," SBF promised. After that, it will go to investors and employees.
Going forward, Alameda Research will wind down trading and soon they won't be trading on FTX anymore, he said.
FTX is trying to raise $4 billion to fill an $8 billion shortfall, Bloomberg reported Wednesday. Alameda Research, FTX's sibling trading firm, owes FTX about $10 billion, the Wall Street Journal reported Thursday.
FTX Faces Probe
Meanwhile, Alameda Research's website went private Wednesday evening as FTX's sibling trading firm was a major factor in the liquidity crisis. Alameda lost $500 million from the Voyager Digital bankruptcy in July. It prompted CEO Sam Bankman-Fried to transfer at least $4 billion in FTX funds to prop up Alameda's $15 billion balance sheet at the time, Reuters reported Thursday. The funds were secured by FTX FTT tokens and shares of Robinhood stock. A portion of which were customer deposits, but an exact value of the assets is unknown.
The Bahamas-based outfit also faces a regulatory probe, according to Bloomberg reports Wednesday. The Securities and Exchange Commission and Commodity Futures Trading Commission are investigating FTX's handling of client funds and lending practices, as well as its relationship with sister company Alameda Research and American counterpart FTX US.
Amidst the crisis Wednesday, VC firm Sequoia Capital completely marked down its FTX investments to $0. Sequoia previously invested $210 million in FTX.com and FTX US.
Binance Backs Out Of Takeover
Also on Wednesday, Binance said it will not follow through with its proposed takeover of FTX after reviewing the company's internal data and books, the Wall Street Journal reported.
"Our hope was to be able to support FTX's customers to provide liquidity, but the issues are beyond our control or ability to help," the world's largest crypto exchange told the WSJ.
It confirmed earlier reports from CoinDesk that Binance would be unlikely to complete the acquisition.
Binance signed a nonbinding letter of intent on Tuesday to buy FTX's non-U.S. operations in an effort to solve FTX's liquidity crisis. The hole in FTX's balance sheet possibly exceeds $6 billion, Bloomberg estimated Wednesday.
The combined news sent Bitcoin down another 11%, to below $16,200 and to its lowest level since November 2020. But Bitcoin rebounded near $17,600 on Thursday on the latest CPI report, pulling crypto prices higher.
Prior to CoinDesk's reports that Binance will back out of the deal, CEO Changpeng Zhao released an internal company memo on Twitter. The memo told Binance employees not to trade FTT tokens during due diligence process and not to comment on the deal. "We have got a good team handling it. Things will play out," he wrote.
Impact On Crypto Exchanges
Zhao said the purchase would not be a "win for us." "FTX going down is not good for anyone in the industry ... User confidence is severely shaken." He expects regulators to scrutinize exchanges more and that licenses around the world will become harder to obtain. Binance must "embrace scrutiny" and significantly increase transparency, Zhao said. And, on Tuesday, he tweeted that Binance will begin doing proof-of-reserves soon for "full transparency."
Meanwhile, Coinbase assured users Tuesday afternoon that it has very little exposure to FTX and no exposure to FTT. The publicly traded crypto exchange says it has $15 million of deposits on FTX to facilitate business operations and client trades. But it has no loans to FTX and no loans to Alameda Research. Still, COIN stock is down roughly 20% so far this week after the price of Bitcoin and other cryptocurrencies crashed.
FTX Token Sell-off
FTX's issues arose last week when CoinDesk reported that FTX's FTT token made up a majority of Alameda Research's balance sheet. Concerns over FTX's financial health sparked major sell-offs and Binance liquidated its FTT holdings.
Users rushed to withdraw more than $1.2 billion from the exchange Monday. Some complained of hourslong wait times for their transaction processes. Meanwhile, the losses continued as the price of FTX's crypto coin FTT collapsed more than 80% to fall below $4 by Wednesday. And it bled to the rest of the market. Bitcoin's price dived below $20,000 for the first time since late October as cryptocurrencies fell on Tuesday. By Wednesday, Bitcoin plummeted below $17,000 and Ethereum dropped below $1,200 — their lowest levels in two years.
Market Impact
However, at least some analysts say the recent decline shouldn't have a long-term impact on crypto prices. "HODLers [crypto slang for holders] don't care about this news, as it's not material long-term," Ric Edelman, founder of the Digital Assets Council of Financial Professionals (DACFP) told IBD. He says the price impact will be "little to none." And for the market, costs may decline long term due to Binance's economies of scale.
One of the key drivers for the industry will be transparency. "Many of the problems of 2022 have largely been a result of leverage among centralized entities, in this case FTX and Alameda," said Matthew Sigel, head of Digital Assets Research at VanEck.
Regulation of centralized exchanges so users know the status of customer assets at all times and proof-of-reserves are good ideas. "As well as a clear separation of ownership and control between market makers (Alameda in this case) and exchanges (FTX)," Sigel said.
"Regardless of the direct [or] actual impact to Bitcoin, this is terrible for sentiment and not surprising to see the volatility around Bitcoin," said Noah Hamman, CEO of AdvisorShares.
"Clearly there are liquidity issues," he said. But it's difficult to assess impact until there's more transparency.
"This situation has caught many by surprise; it would be naive to think there are not more surprises coming," Hamman said. Still, firms such as Fidelity Investments getting into crypto and increases in institutional adoption is a "great sign that more growth is ahead."
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
