Binance, the world’s largest crypto exchange by volume, has signed a letter of intent to buy its closest competitor, FTX, making huge waves in the crypto community after the putative billionaire CEOs of the exchanges engaged in a multiday public dispute on Twitter.
“It’s like real-life ‘Game of Thrones,’” Alex Taub, founder and CEO of DAO-focused platform Upstream, said to TechCrunch in a message. Today’s acquisition news was bigger than the HBO show’s dramatic Red Wedding massacre scene.
FTX was quick to spin the potential sale of its business as a win. “A *huge* thank you to [Changpeng “CZ” Zhao], Binance, and all of our supporters,” FTX founder and CEO Sam Bankman-Fried said in a tweet on Tuesday regarding the deal. “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.”
But it’s a slam-dunk outcome for Binance after a heated spat. Investors, founders and operators throughout the crypto community noted that the deal makes Binance appear strong amid a bear market for the sector while raising questions about FTX’s solvency and financial performance.
“It’s crypto winter now, and it’s time when the market checks everyone for weakness,” Serhii Zhdanov, CEO of cryptocurrency exchange EXMO, said to TechCrunch. “Exchanges as main players bear the main damage because of low liquidity, while their main income is from trading fees. It’s enough to check the change [in] trading volumes for the last year to understand how tough the situation is.
“Naturally, it’s time of mergers and acquisitions,” Zhdanov said. “We might see more such stories in the near future.”
The present story has some peculiarities, though, as there has been a connection between Binance and FTX since 2019, Zhdanov said, nodding toward Binance’s historical equity position in FTX. “Everything we watched these two days looks like a part of their internal showdown.”
Some market players have criticized Binance for Zhao’s comments leading up to the announcement that his firm was selling billions of dollars worth of its position in FTX’s native FTT token. Zhao’s tweets ultimately led to a steep drop in FTT’s token price, inviting speculation that perhaps he knew the token price would tank in reaction to his comments and planned to buy the competing exchange at a cheaper price as a result.
But the worst part of it all? The FTT/FTX issue is having a “negative impact on the market and many ordinary users [are] lost in someone else’s game,” Zhdanov said. “This doesn’t improve the image of both platforms despite all positive words declared in the end.”
The deal (and drama) itself is still far from done, as Nate Anderson of Hindenburg Research pointed out in a Tweet today.
“Binance is simply declaring that FTX is toast, and that it has an option to step in if it wants to,” Anderson tweeted.
“I personally assign a ~10% chance that CZ follows through on the deal,” Dylan LeClair, senior analyst at digital asset fund UTXO Management and co-founder of 21st Paradigm, said in a tweet on Tuesday. “Even if I was sitting on $10b liquid, you couldn’t PAY me to acquire this dumpster fire. You’re telling me CZ is going to want to acquire an insolvent exchange where he has to make things whole? Sure.”
Alameda Research’s balance sheet leak showed significant liquidity mismatches between its assets and its liabilities, and its public disclosure was the catalyst that triggered recent events, Ryan Shea, crypto economist at Trakx, said to TechCrunch.
“As Sam Bankman-Fried outlined via a Twitter thread, all client assets will be covered 1:1,” Shea added. “For FTX users, this is good news, but it does raise some rather obvious questions about how FTX was managed and how interconnected it was with SBF’s other venture, Alameda Research.”
Concerns surrounding FTX’s liquidity grew following a Thursday report from CoinDesk about the balance sheet of Alameda Research, a crypto trading firm once run by Bankman-Fried. Alameda holds $14.6 billion in assets with $8 billion in liabilities as of June 30, CoinDesk reported.
The report showed Alameda’s largest asset was about $3.66 billion of “unlocked FTT” and $2.16 billion of “FTT collateral.” This means the $5.82 billion in total FTT that Alameda owns was equal to 193% of the total known FTT market cap, which was about $3 billion on Monday, according to CoinMarketCap data. On Tuesday as of the time of publication, FTT’s market cap fell nearly 80% to $630 million.
“Clearly FTX did not go into this deal with Binance from a position of strength,” Shea said. “As an exchange, FTX should not have much balance sheet risk and should have been able to process client withdrawals, albeit with some delays due to infrastructure bottlenecks. The speed with which this agreement has been reached suggests the situation at FTX and/or Alameda Research was more serious, potentially existential, in nature.”
FTT is currently trading around $4.60, down about 80% in the past 24 hours, according to data from CoinMarketCap.