Volatility in the cryptocurrency markets is nothing new. In May, markets suffered a $2 trillion crash, and have slowly recovered. But news that the world’s second largest crypto exchange was on the verge of collapse has sent prices falling once again.
FTX, run by Sam Bankman-Fried out of the Bahamas, has spent millions of dollars lobbying for crypto-friendly regulation in the United States, and was second in the world only to Binance prior to this week. Binance, run by the billionaire Changpeng Zhao, has no official headquarters and was one of the early investors in FTX.
FTX has a native cryptocurrency token called FTT, and last year Bankman-Fried bought back Binance’s stake in the company, paying partially with FTT tokens. Last week, CoinDesk reported that Alameda Research, a hedge fund run by Bankman-Fried, held a large amount of FTT tokens, despite FTX and Alameda being completely separate businesses.
The report claimed the two companies had close financial ties and this was enough for Binance to announce on November 6 it would sell its FTT tokens, causing the price of FTT to plummet. Traders then fell over each other to pull out of FTX entirely, fearing the company was about to go under.
The requests for withdrawals were too much for FTX to handle. An estimated $6 billion was taken out over three days, and the platform appeared to enter a liquidity crunch.
On Tuesday this week, it appeared that FTX would be saved after Binance announced it had reached a deal to bail out its competitor by buying it. But the next day Binance pulled the plug on the deal, as a result of “corporate due diligence” and cited reports of misused funds and regulatory issues.
“Every time a major player in an industry fails, retail consumers will suffer,” Binance said in a statement. “We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.”
The collapse was bad news for investors and the crypto industry as a whole. One of the largest external investors in the company, VC firm Sequoia, wrote down its $150 million investment to nothing. “In recent days, a liquidity crunch has created a solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0,” the investors wrote.
The wider cryptocurrency market also suffered losses. Bitcoin fell over 7.6% at one point this week and ethereum dropped 4.4%. Investors also withdrew $700 million from Tether, the stablecoin that underpins most of the crypto economy.