November 27, 2022

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Crypto exchange Binance is buying rival FTX in what appears to be a bailout

3 min read

Cryptocurrency exchange Binance said it plans to buy its rival FTX Trading, which is the latest example of how fortunes can change rapidly in the crypto world.

Binance CEO Changpeng Zhao said on Twitter Tuesday that his company had signed a letter of intent to buy FTX because the smaller exchange was experiencing a “significant liquidity crisis.” The deal is still subject to due diligence, Zhao said on Twitter.

The news shook the cryptocurrency world as the largest crypto exchange appeared to have had to bail out the third largest exchange. Prices for major crypto assets plummeted, with bitcoin prices falling more than 10% and Ethereum down more than 15%.

Shares of publicly traded companies with heavy crypto exposure also fell sharply, with Coinbase and Robinhood posting double-digit percentage declines.

FTX founder and CEO Samuel Bankman-Fried also told Twitter that the deal with Binance would protect the exchange’s customers. It’s a surprising turn of events after Bankman-Fried was hailed as a savior of sorts earlier this year when he helped shore up a number of cryptocurrency companies struggling financially.

FTX is the latest cryptocurrency company to come under financial pressure this year as crypto assets like Bitcoin and Ethereum have plummeted in value. The defaulters include Celsius, a bank-like company that has been taking crypto deposits for returns, as well as an Asia-based hedge fund called Three Arrows Capital.

Coindesk, which specializes in news about digital assets, reported last week that much of the balance sheet of Bankman-Fried’s trading firm Alameda Research was tied up in FTX’s own digital token called FTT. Binance rocked the market over the weekend when it said it plans to liquidate its holdings of FTT amid concerns that FTX is illiquid.

Binance’s public announcement sparked a crypto-like bank run on FTX, with major investors attempting to withdraw their funds over the past 48 hours.

On Tuesday morning, cryptocurrency investors said they were also having trouble withdrawing funds from FTX. The value of the FTT, which had stabilized after the deal was announced, plummeted from its previous price of around $20 to around $3 over the weekend.

Cory Klippsten, CEO of bitcoin financial services firm Swan Bitcoin, said companies with large amounts of so-called altcoins on their balance sheets are “literally trust games” and vulnerable to collapse.

“The only hope once they’re under pressure is that another player will bail them out, as we’ve seen with Binance and FTX.”

Bankman-Fried said that neither Binance’s US operations nor FTX were involved in the deal announced on Tuesday.

The deal would make Binance, already the largest cryptocurrency exchange by daily volume, an even more dominant player in the cryptocurrency industry. FTX was the third largest exchange this week.

Bankman-Fried, better known by his initials SBF, was hailed by the crypto industry earlier this year after promising to buy certain crypto assets to bolster the balance sheets of other failing crypto companies. These included companies like Voyager Digital, which failed after a stake in failed stablecoin Terra.

Bankman-Fried also bought a stake in online trading platform Robinhood after that company’s shares plummeted on falling earnings and cash losses.

Photo credit: Stanislav Shahurin | Dreamstime.com

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