The days and weeks ahead are going to be long, very long, for cryptocurrencies and their related businesses.
The industry is once again going through a crisis of confidence which was provoked by the surprise announcement, on Nov. 8, that the young billionaire Sam Bankman-Fried, who appeared as the savior of companies in difficulty last summer, was going to urgently sell his empire to his great rival, Changpeng Zhao, to avoid an unprecedented liquidity crisis.
This empire is made up of the cryptocurrency exchange FTX.com, whose ambassadors are sports stars Stephen Curry and Tom Brady. There is also the high frequency trading platform Alameda Research.
Financial details of the transaction were not disclosed.
But this deal is more of a bailout, as Zhao indicated that FTX and Alameda were on the verge of insolvency.
"This afternoon, FTX asked for our help," Zhao, co-Founder and CEO of Binance, wrote on Nov. 8. "There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days," he added.
DD refers to Due Diligence.
Fears of Contagion
The announcement caused a drop in the prices of cryptocurrencies and shares of companies in the sector. Bitcoin (BTC) is down 9.2% at $17,714.53 in the past 24 hours, while Ether (ETH), the second-largest digital currency by market value, fell 15% to $1,235.93, according to data provided by CoinGecko.
In the stock market, it is also a debacle for crypto companies. Coinbase (COIN), the only publicly listed crypto exchange, lost 5% on November 9, after having already fallen 13% the day of the announcement.
Microstrategy (MSTR), the software company of billionaire and crypto evangelist Michael Saylor, fell 5%, after a 24% collapse the day before. The firm is the public company holding the most bitcoins in its balance sheet, as a result of a big bet on digital assets.
Marathon Digital (MARA), a crypto mining company, was down 3%, after losing 10% the day before.
"There is sufficient reason to believe the risk of further contagion remains due to defaults on loans to Alameda," said FS Insight head of Digital Asset Strategy, Sean Farrell.
He added: "Given the current unknowns, it may be prudent to raise some cash in the event of additional drawdowns across other major cryptoassets."
Coinbase distanced itself and tried to reassure investors by explaining that its financial situation was solid.
"Today, Coinbase and our customers are not in any direct danger of liquidity or credit risk," said Chief Financial Officer Alesia Haas in a blog post. "Regardless of whether the Binance/FTX transaction completes, we have very little exposure to FTX and we have no exposure to its token, FTT. Currently we have $15 million worth of deposits on FTX to facilitate business operations and client trades. We have no exposure to Alameda Research, and we have no loans to FTX."
Investors are convinced that many crypto firms have exposure to Alameda, which provided funds to many companies when sister digital currencies Luna and UST, or TerraUSD, collapsed last May.
This debacle led to the bankruptcy of hedge fund Three Arrows Capital, crypto lenders Voyager Digital and Celsius Network.
Investors lost at least $55 billion in the collapse of Luna and UST.
Voyager and Celsius customers are still trying to get their money back.
