Crypto markets are once again facing a huge stress test. This time in the form of the worlds second largest exchange, proving to be insolvent and allegedly fraudulent. In today's report we aim to deliver you the key facts of what has happened so far and what to anticipate next.
How Did This Happen?
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
Early Monday morning rumours started to build that the second largest exchange, FTX was insolvent. This was triggered by Changpeng Zhao, founder and CEO of Binance, as he sent out a Twitter thread outlining his concerns with FTX and their associated token, FTT.
In summary, the situation unfolded in the following manner:
1) Binance co-founder ‘CZ’ announced that Binance is selling vast amounts of acquired FTT tokens (Binance was a core investor in FTX in its early stages) due to “recent revelations” and rumours of FTX’s potential insolvency.
2) FTX and its associated company Alameda Research were significantly over-leveraged with collateral backed by this FTT token.
3) FTT sells off heavily, causing collateral to lower in value and placing pressure on the balance sheet.
4) Panic and fear grips the market and users rush to withdraw funds from FTX, causing a bank run of approx. $6 Billion USD in a matter of days.
5) Overnight, FTX is forced to halt withdrawals due to a liquidity crunch and is forced to seek help from Binance via a potential acquisition of FTX to ensure all funds are backed 1:1.
6) Markets pause from selling off as rumours of a Binance takeover gives confidence that the worst of the news has already occurred.
7) Binance backs away from FTX takeover citing "as a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX".
8) Crypto market resumes panic and prices begin to sell-off again as the hole in the FTX balance sheet appears to be around $8 Billion USD, due to mishandling of customer deposits and fraudulent business practices.
You have now effectively been brought up to speed on what has happened in a whirlwind 72 hours. We can now better prepare to move forward and take advantage of quite a dour situation as it unfolds.
Why Does This Matter?
This industry isn’t about BTC vs ETH or cefi vs DEXs. It’s about those building (in any form) towards real value and a more cypherpunk/decentralized future, vs those who just see cryptocurrency as a way to make a quick buck, scamming others. More excited to build than ever.
— Ari Paul ⛓️ (@AriDavidPaul) November 10, 2022
Unfortunately what has happened is a huge breakdown in trust, institutional progress and justifiably increased crypto scrutiny and scepticism. That take is just from a high level, from a market structure perspective, so much liquidity is being drained out and asset prices are getting crushed as more leverage gets taken out of the system.
DeFi protocols will also suffer in the short term, as Alameda Research was a large investor in a lot of these projects and also provided market making services to bootstrap their liquidity and provide more stable prices.
We will also likely see the SBF "coins" such as FTT and Solana be the worst performers in this bloodshed, as their entire ecosystem was quite aggressively supported by FTX and Alameda Research.
Finally, the collapse of the worlds second largest crypto exchange could leave millions of users funds locked up for years to come, and could trigger a wave of reactionary regulations that could slow crypto adoption. Worst yet, it might paint all of the crypto industry with the same brush and not distinguish between the genuine start-ups and entrepreneurs than those of outright fraudsters.
What Happens Next?
As of the time of writing, just north of $200 Billion USD has been wiped from the total crypto market cap as the FTX insolvency sets in. The sheer capital destruction has been immense and will probably carry on as more details come through. Right now, it's still unclear how exactly SBF and FTX blew through an 8 figure per day revenue business, that ended with them having an $8 Billion USD hole on their balance sheet. Greed certainly comes to mind but markets hate uncertainty and until we get a clearer understanding of what happened, crypto asset prices are going to continue to suffer.
FTX and Alameda Research will likely declare bankruptcy and all their depositors will become unsecured creditors, where a lengthy claimant process will begin and receiving funds will be a drawn out process. Hopefully this won't be as slow as the Mt. Gox hack that unfolded in 2013, with claimants are still yet to receive funds.
Right now, we suggest you contact your Stormrake crypto broker and formulate the best plan of approach, as there will be extreme discounts to secure. This will help already invested customers, reduce their average significantly, whilst those who have yet to get started, get the opportunity to start from the lowest price point in 2022.
To be clear, we're not suggesting or implying that the bottom is in just yet, we're likely to see some more downside but we just wish for our clients to be prepared. Should you have any questions or concerns, please reach out to us as we're happy to help you in any way possible.
To be clear, we're not suggesting or implying that the bottom is in just yet, we're likely to see some more downside but we just wish for our clients to be prepared. Should you have any questions or concerns, please reach out to us as we're happy to help you in any way possible.
It's a tough road ahead for crypto investors but you don't have to take it alone, we're here to not just help you trade but to be a pillar of support in your crypto investing journey.
The Holy Grail
We leave you with some valuable insights on how to get ahead despite all the noise and volatility that has encapsulated the crypto space in 2022. Measured and restrained purchases set at specific time intervals into Bitcoin will allow everyday investors to get the exposure they need, without having to branch out the risk curve.
No Advice Warning
The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.
Stormrake is not a financial adviser and does not provide financial product advice. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Stormrake is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by this newsletter.
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