Binance’s Deal for Rival FTX Marks Power Shift Amid Crypto Turmoil
Cryptocurrency exchange FTX, months after looking like a shining survivor in a struggling industry, succumbed Tuesday to a sudden liquidity crunch of its own and agreed to be taken over by rival Binance.
The deal signals a power shift in the crypto world, which has been hurt by rising interest rates and investors’ retreat from risk. The pact marks a victory for Binance founder Changpeng Zhao and a humbling comedown for Sam Bankman-Fried, the founder of FTX, which had been growing in size and recognition before a clash between the two men set off a series of events that shook investor confidence in his firm.
Collapses of crypto hedge funds and trading firms this year have whittled down a sprawling and crowded field of new institutions that set out to build a new kind of finance. FTX, valued at $32 billion in a funding round in January, is by far the biggest to stumble.
It suffered a very old kind of problem: a run. Its users pulled money and cryptocurrency out of their accounts en masse, prompting worries by remaining investors that they could be caught out. Binance then stepped in.
The sudden reversal of fortune at FTX highlights the fragility and instability of crypto markets, which have been under intense scrutiny from investors, regulators and others for their propensity to expose investors to large losses.
Some of Silicon Valley’s and Wall Street’s highest-profile firms stand to be burned as a result of the problems at FTX. Among the investors in the $900 million fundraising last year were SoftBank Group Corp., Sequoia Capital, hedge fund Third Point and tech-oriented private-equity firm Thoma Bravo.
Crypto firms, thanks to their holdings of extremely volatile assets that have in many cases undergone large declines, “are inherently fragile, susceptible to a Lehman-like collapse at any time,” said Cory Klippsten, chief executive of Swan.com, a bitcoin financial-services firm, referring to the investment bank that collapsed in 2008. “And the only hope once under pressure is that another player will bail them out, as we’ve seen with Binance and FTX.”
Surging prices for bitcoin and other digital assets during the Covid-19 market rebound rewarded many investors and entrepreneurs, making billionaires of a few. But rising inflation in 2022 has reversed many of those gains and has put the entire industry on a much slipperier footing.
The acquisition of FTX further consolidates the cryptocurrency world, with Binance emerging as the unquestioned giant. That means that Binance will touch an increased number of cryptocurrency traders and companies.
“Binance really becomes the unchallenged leader,” said Ilan Solot, co-head of digital assets at Marex Solutions, a London-based financial services firm specializing in derivatives.
The failure of one of the leading cryptocurrency firms is another blow to the credibility of the crypto ecosystem, which has lured interest not just from individual traders but banks and traditional asset managers alike.
Hot-cold relationship
Binance and FTX had long had a hot-and-cold relationship. Binance was an early investor in FTX, which was later propelled by venture financing from Silicon Valley luminaries. The two exchanges became big competitors.
Mr. Bankman-Fried frequently visited Washington, and pitched his exchange as one friendly to regulators—at times drawing a barbed contrast to Binance. A person close to Binance said Mr. Zhao had been rankled by some of Mr. Bankman-Fried’s comments. But Binance still held hundreds of millions of dollars worth of FTX’s own cryptocurrency, called FTT.
Until this past weekend. On Sunday, Mr. Zhao tweeted that Binance would sell its $580 million in FTT holdings over the next few months, saying he wouldn’t “support people who lobby against other industry players behind their backs.”
The announcement fueled a sharp decline in the price of the FTT cryptocurrency to as low as $15, likely squeezing FTX’s finances and spurring a retreat by other investors. That prompted other customers to yank their money from FTX, and the run was under way.
As of Tuesday morning, FTX experienced $1.4 billion in withdrawals on the Ethereum blockchain over the previous 24 hours, according to Andrew Thurman, content lead at analytics firm Nansen, versus just $523 million in inflows.
Nexo, a large crypto-lending platform, has withdrawn about $110 million worth of cryptocurrency from FTX, a spokeswoman said. Firms that facilitate crypto trades said they reallocated funds to other exchanges. Some individual traders on Twitter complained that they were unable to withdraw funds.
Several investors in FTX said they didn’t know about the deal until Messrs. Zhao and Bankman-Fried broke the news on Twitter late Tuesday morning Eastern time, according to people familiar with the matter.
Jakob Palmstierna, chief executive of crypto market maker GSR, said roughly 30 minutes before the announcement that his firm had been in communication with FTX throughout the day. FTX had assured GSR it was still well-funded. He said he learned of the announcement on Twitter.
Mr. Bankman-Fried wrote a letter to some investors Tuesday afternoon telling them the details of the deal were still being hashed out and he couldn’t offer much more information, according to the letter, which was reviewed by The Wall Street Journal.
The first priority, he said, was protecting customers’ assets and the industry, followed by FTX shareholders.
“I’m sorry I didn’t do better,” he wrote. “I’m going to do what I can to protect customer assets and your investment,” he added.
Concerns about FTX fueled a rout in cryptocurrencies not seen since May, when sister cryptocurrencies Luna and TerraUSD began spiraling in crypto’s version of a bank run.
FTX’s own cryptocurrency, FTT, initially plunged Tuesday, shedding more than a third of its value, before partly recovering following the announcement of the deal.
The Dow closed 1% higher Tuesday, on a day in which markets outside of crypto were largely higher. Digital assets fell sharply after an initial rally following the deal.
Bitcoin was down 13%. Robinhood Markets Inc., of which Mr. Bankman-Fried is an investor, fell 20% and crypto exchange Coinbase Global Inc. dropped 13%.
The agreement appears to mean that FTX customers will have access to their funds at some point, analysts said, though the details remained scarce Tuesday afternoon. Among other question marks, the development announced Tuesday is a nonbinding letter of intent that concerns the international operations of FTX. Its much smaller U.S. division, which is a separate entity, isn’t part of the deal, Mr. Bankman-Fried said on Twitter.
“This is a highly dynamic situation, and we are assessing the situation in real time,” Mr. Zhao said on Twitter. “Binance has the discretion to pull out from the deal at any time.”
Binance is the world’s largest cryptocurrency exchange by volume and was founded and is helmed by Chinese-born Mr. Zhao, who launched it in 2017. Frequently referred to by his initials, CZ, Mr. Zhao has become one of the most influential voices in the cryptocurrency industry.
Binance operates a trading website worldwide but has long operated without an official headquarters and without registration in many countries, making it a target of financial regulators. Earlier this year, it made Paris its European hub.
Spot trading volume of cryptocurrencies on Binance in September accounted for more than half of industry trading, according to data provider CryptoCompare. Binance’s footprint in crypto derivatives is even larger, with September volume of $1.63 trillion.
Binance was also among the investors that agreed to back Elon Musk with financing to purchase Twitter Inc.
FTX is the brainchild of Mr. Bankman-Fried, the millennial billionaire hailed as a savior of the crypto industry. It was launched in 2019 and attracted backers including Singapore’s sovereign-wealth fund Temasek Holdings Pte. Ltd., Silicon Valley venture-capital firms and the Ontario Teachers Pension Plan.
Up until this week, being an investor in FTX was a badge of honor. Unlike much of the crypto world, its investors boasted, FTX was doing well and going on a deal spree. Its valuation had held up even as the crypto market plunged, making it one of the most valuable startups in the world.
Bahamas-based FTX grew into the fourth-largest cryptocurrency exchange for derivatives trading as of September, according to CryptoCompare. It has also broadened its horizons beyond cryptocurrencies, expanding into stock trading earlier this year.
FTX this summer stepped in to buy large stakes in troubled crypto lenders BlockFi and Voyager Digital at a discount during the recent months of market carnage.
In 2017, Mr. Bankman-Fried founded trading firm Alameda Research, one of the largest in digital-currency markets. The firm, majority-owned by Mr. Bankman-Fried, is known for using sophisticated quantitative strategies to profit from the wild swings in the crypto market. The exact ties between Alameda’s operations and FTX have long been questioned, with investors wary that issues facing one could bleed into the other. Alameda is a market maker providing liquidity on FTX.
Mr. Bankman-Fried, whose net worth once exceeded $25 billion, cast himself not just as a consolidator of the crypto industry, but also its chief marketer.
Mr. Bankman-Fried was estimated to have a net worth of $15.6 billion as of Monday, according to the Bloomberg Billionaires Index, which cited him as being among the 100 richest people in the world. Much of his wealth is concentrated in FTX and Alameda Research. It isn’t clear how Tuesday’s developments will affect that figure.
To stand apart from the pack of hundreds of crypto exchanges, FTX sidestepped startups’ traditional marketing playbook and strode for the limelight, hiring A-list spokespeople from the sports world and paying big money to put its name on everything from an NBA arena and race cars to a prestigious chess tournament.
Name to trust
The aim was to establish FTX as a household name that people could trust with their money, even if they couldn’t necessarily explain how cryptocurrency worked.
FTX is a top-five exchange, too, but it looks like a small-fry relative to Binance. FTX’s September volumes for spot trading were about 10% of Binance’s, according to CryptoCompare. Its derivative volume was about 15% of Binance’s.
Fears over FTX and Alameda Research started last week after CoinDesk published a report that indicated that much of Alameda’s balance sheet was made up of FTT, a cryptocurrency that traders considered difficult to buy or sell without affecting the price. After a year of high-profile cryptocurrency blowups and concerns about contagion across the crypto market, the report put investors on edge about what Binance’s liquidation could mean for the stability of FTT and FTX itself.
The CoinDesk report also claimed that Alameda counted several small, hard-to-trade cryptocurrencies as assets.
Alameda CEO Caroline Ellison sought to reassure investors on Sunday that the firm’s balance sheet was stronger than reflected in the CoinDesk article and offered to buy Binance’s FTT holdings from Mr. Zhao at $22 apiece.
Kevin March, co-founder of Floating Point Group, an institutional trading desk, said between 10% and 15% of its institutional customer base reached out to inquire whether FTX was under financial stress and if they should pull assets off the exchange.
Just Monday, Mr. Bankman-Fried said on Twitter that the exchange was “fine” and had more than $1 billion in excess cash to cover its liquidity needs.
“We have a long history of safeguarding client assets, and that remains true today,” he said.
—Justin Baer, Eliot Brown, Peter Rudegeair, Berber Jin and Ryan Dezember contributed to this article.
Write to Caitlin Ostroff at [email protected] and Caitlin McCabe at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Cryptocurrency exchange FTX, months after looking like a shining survivor in a struggling industry, succumbed Tuesday to a sudden liquidity crunch of its own and agreed to be taken over by rival Binance.
The deal signals a power shift in the crypto world, which has been hurt by rising interest rates and investors’ retreat from risk. The pact marks a victory for Binance founder Changpeng Zhao and a humbling comedown for Sam Bankman-Fried, the founder of FTX, which had been growing in size and recognition before a clash between the two men set off a series of events that shook investor confidence in his firm.
Collapses of crypto hedge funds and trading firms this year have whittled down a sprawling and crowded field of new institutions that set out to build a new kind of finance. FTX, valued at $32 billion in a funding round in January, is by far the biggest to stumble.
It suffered a very old kind of problem: a run. Its users pulled money and cryptocurrency out of their accounts en masse, prompting worries by remaining investors that they could be caught out. Binance then stepped in.
The sudden reversal of fortune at FTX highlights the fragility and instability of crypto markets, which have been under intense scrutiny from investors, regulators and others for their propensity to expose investors to large losses.
Some of Silicon Valley’s and Wall Street’s highest-profile firms stand to be burned as a result of the problems at FTX. Among the investors in the $900 million fundraising last year were SoftBank Group Corp., Sequoia Capital, hedge fund Third Point and tech-oriented private-equity firm Thoma Bravo.
Crypto firms, thanks to their holdings of extremely volatile assets that have in many cases undergone large declines, “are inherently fragile, susceptible to a Lehman-like collapse at any time,” said Cory Klippsten, chief executive of Swan.com, a bitcoin financial-services firm, referring to the investment bank that collapsed in 2008. “And the only hope once under pressure is that another player will bail them out, as we’ve seen with Binance and FTX.”
Surging prices for bitcoin and other digital assets during the Covid-19 market rebound rewarded many investors and entrepreneurs, making billionaires of a few. But rising inflation in 2022 has reversed many of those gains and has put the entire industry on a much slipperier footing.
The acquisition of FTX further consolidates the cryptocurrency world, with Binance emerging as the unquestioned giant. That means that Binance will touch an increased number of cryptocurrency traders and companies.
“Binance really becomes the unchallenged leader,” said Ilan Solot, co-head of digital assets at Marex Solutions, a London-based financial services firm specializing in derivatives.
The failure of one of the leading cryptocurrency firms is another blow to the credibility of the crypto ecosystem, which has lured interest not just from individual traders but banks and traditional asset managers alike.
Hot-cold relationship
Binance and FTX had long had a hot-and-cold relationship. Binance was an early investor in FTX, which was later propelled by venture financing from Silicon Valley luminaries. The two exchanges became big competitors.
Mr. Bankman-Fried frequently visited Washington, and pitched his exchange as one friendly to regulators—at times drawing a barbed contrast to Binance. A person close to Binance said Mr. Zhao had been rankled by some of Mr. Bankman-Fried’s comments. But Binance still held hundreds of millions of dollars worth of FTX’s own cryptocurrency, called FTT.
Until this past weekend. On Sunday, Mr. Zhao tweeted that Binance would sell its $580 million in FTT holdings over the next few months, saying he wouldn’t “support people who lobby against other industry players behind their backs.”
The announcement fueled a sharp decline in the price of the FTT cryptocurrency to as low as $15, likely squeezing FTX’s finances and spurring a retreat by other investors. That prompted other customers to yank their money from FTX, and the run was under way.
As of Tuesday morning, FTX experienced $1.4 billion in withdrawals on the Ethereum blockchain over the previous 24 hours, according to Andrew Thurman, content lead at analytics firm Nansen, versus just $523 million in inflows.
Nexo, a large crypto-lending platform, has withdrawn about $110 million worth of cryptocurrency from FTX, a spokeswoman said. Firms that facilitate crypto trades said they reallocated funds to other exchanges. Some individual traders on Twitter complained that they were unable to withdraw funds.
Several investors in FTX said they didn’t know about the deal until Messrs. Zhao and Bankman-Fried broke the news on Twitter late Tuesday morning Eastern time, according to people familiar with the matter.
Jakob Palmstierna, chief executive of crypto market maker GSR, said roughly 30 minutes before the announcement that his firm had been in communication with FTX throughout the day. FTX had assured GSR it was still well-funded. He said he learned of the announcement on Twitter.
Mr. Bankman-Fried wrote a letter to some investors Tuesday afternoon telling them the details of the deal were still being hashed out and he couldn’t offer much more information, according to the letter, which was reviewed by The Wall Street Journal.
The first priority, he said, was protecting customers’ assets and the industry, followed by FTX shareholders.
“I’m sorry I didn’t do better,” he wrote. “I’m going to do what I can to protect customer assets and your investment,” he added.
Concerns about FTX fueled a rout in cryptocurrencies not seen since May, when sister cryptocurrencies Luna and TerraUSD began spiraling in crypto’s version of a bank run.
FTX’s own cryptocurrency, FTT, initially plunged Tuesday, shedding more than a third of its value, before partly recovering following the announcement of the deal.
The Dow closed 1% higher Tuesday, on a day in which markets outside of crypto were largely higher. Digital assets fell sharply after an initial rally following the deal.
Bitcoin was down 13%. Robinhood Markets Inc., of which Mr. Bankman-Fried is an investor, fell 20% and crypto exchange Coinbase Global Inc. dropped 13%.
The agreement appears to mean that FTX customers will have access to their funds at some point, analysts said, though the details remained scarce Tuesday afternoon. Among other question marks, the development announced Tuesday is a nonbinding letter of intent that concerns the international operations of FTX. Its much smaller U.S. division, which is a separate entity, isn’t part of the deal, Mr. Bankman-Fried said on Twitter.
“This is a highly dynamic situation, and we are assessing the situation in real time,” Mr. Zhao said on Twitter. “Binance has the discretion to pull out from the deal at any time.”
Binance is the world’s largest cryptocurrency exchange by volume and was founded and is helmed by Chinese-born Mr. Zhao, who launched it in 2017. Frequently referred to by his initials, CZ, Mr. Zhao has become one of the most influential voices in the cryptocurrency industry.
Binance operates a trading website worldwide but has long operated without an official headquarters and without registration in many countries, making it a target of financial regulators. Earlier this year, it made Paris its European hub.
Spot trading volume of cryptocurrencies on Binance in September accounted for more than half of industry trading, according to data provider CryptoCompare. Binance’s footprint in crypto derivatives is even larger, with September volume of $1.63 trillion.
Binance was also among the investors that agreed to back Elon Musk with financing to purchase Twitter Inc.
FTX is the brainchild of Mr. Bankman-Fried, the millennial billionaire hailed as a savior of the crypto industry. It was launched in 2019 and attracted backers including Singapore’s sovereign-wealth fund Temasek Holdings Pte. Ltd., Silicon Valley venture-capital firms and the Ontario Teachers Pension Plan.
Up until this week, being an investor in FTX was a badge of honor. Unlike much of the crypto world, its investors boasted, FTX was doing well and going on a deal spree. Its valuation had held up even as the crypto market plunged, making it one of the most valuable startups in the world.
Bahamas-based FTX grew into the fourth-largest cryptocurrency exchange for derivatives trading as of September, according to CryptoCompare. It has also broadened its horizons beyond cryptocurrencies, expanding into stock trading earlier this year.
FTX this summer stepped in to buy large stakes in troubled crypto lenders BlockFi and Voyager Digital at a discount during the recent months of market carnage.
In 2017, Mr. Bankman-Fried founded trading firm Alameda Research, one of the largest in digital-currency markets. The firm, majority-owned by Mr. Bankman-Fried, is known for using sophisticated quantitative strategies to profit from the wild swings in the crypto market. The exact ties between Alameda’s operations and FTX have long been questioned, with investors wary that issues facing one could bleed into the other. Alameda is a market maker providing liquidity on FTX.
Mr. Bankman-Fried, whose net worth once exceeded $25 billion, cast himself not just as a consolidator of the crypto industry, but also its chief marketer.
Mr. Bankman-Fried was estimated to have a net worth of $15.6 billion as of Monday, according to the Bloomberg Billionaires Index, which cited him as being among the 100 richest people in the world. Much of his wealth is concentrated in FTX and Alameda Research. It isn’t clear how Tuesday’s developments will affect that figure.
To stand apart from the pack of hundreds of crypto exchanges, FTX sidestepped startups’ traditional marketing playbook and strode for the limelight, hiring A-list spokespeople from the sports world and paying big money to put its name on everything from an NBA arena and race cars to a prestigious chess tournament.
Name to trust
The aim was to establish FTX as a household name that people could trust with their money, even if they couldn’t necessarily explain how cryptocurrency worked.
FTX is a top-five exchange, too, but it looks like a small-fry relative to Binance. FTX’s September volumes for spot trading were about 10% of Binance’s, according to CryptoCompare. Its derivative volume was about 15% of Binance’s.
Fears over FTX and Alameda Research started last week after CoinDesk published a report that indicated that much of Alameda’s balance sheet was made up of FTT, a cryptocurrency that traders considered difficult to buy or sell without affecting the price. After a year of high-profile cryptocurrency blowups and concerns about contagion across the crypto market, the report put investors on edge about what Binance’s liquidation could mean for the stability of FTT and FTX itself.
The CoinDesk report also claimed that Alameda counted several small, hard-to-trade cryptocurrencies as assets.
Alameda CEO Caroline Ellison sought to reassure investors on Sunday that the firm’s balance sheet was stronger than reflected in the CoinDesk article and offered to buy Binance’s FTT holdings from Mr. Zhao at $22 apiece.
Kevin March, co-founder of Floating Point Group, an institutional trading desk, said between 10% and 15% of its institutional customer base reached out to inquire whether FTX was under financial stress and if they should pull assets off the exchange.
Just Monday, Mr. Bankman-Fried said on Twitter that the exchange was “fine” and had more than $1 billion in excess cash to cover its liquidity needs.
“We have a long history of safeguarding client assets, and that remains true today,” he said.
—Justin Baer, Eliot Brown, Peter Rudegeair, Berber Jin and Ryan Dezember contributed to this article.
Write to Caitlin Ostroff at [email protected] and Caitlin McCabe at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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