Key takeaways
- After announcing a rescue acquisition of FTX, Binance has pulled out of the deal citing concerns about their business practices and ongoing investigations from U.S. regulators.
- This comes even after rumors that the acquisition cost for FTX was to be just $1, a staggering number given that Sam Bankman-Fried raised funding at a $32 billion valuation in January.
- The latest development has sent crypto markets tumbling, with all major currencies down significantly over the past few days.
- For crypto investors who are brave enough to wade in, there are some very specific steps you should take to protect yourself as much as possible from the insane volatility.
Stock Market: “Wow it’s been a crazy volatile year for us!”
Crypto: “Hold my beer.”
Yes that’s right crypto is crashing again. And not crashing after having recovered, crashing from around the bottom of the previous crash. Bitcoin has hit its lowest price in nearly two years as the fallout from the FTX situation sends rumbles throughout the sector.
So what’s going on with this whole FTX thing and why is it causing the crypto market to tank? We’ll explain, but keep in mind that this is a rapidly moving situation. Expect changes to happen regularly, but you can follow us here to stay up to date with all the latest news in crypto.
MORE FROMFORBES ADVISOR
This current drop in prices is happening as a direct result of the apparent collapse of one of the worlds largest crypto exchanges FTX. First, let’s cover off what’s been happening and cover how FTX has gone from the most blue chip of crypto companies to the brink of disaster.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.
The rise of FTX
Up until now, FTX founder Sam Bankman-Fried (often referred to as simply SBF) and his company have been considered crypto royalty. The company was only started back in 2019, with another major crypto exchange, Binance, one of their early investors.
It was great timing for SBF as his company rode the pandemic crypto bull run, going from $0 revenue to $1.2 billion in just two years. Not a $1.2 billion valuation, $1.2 billion in revenue.
Just a few short months ago during their last funding round in January 2022, FTX was valued at $32 billion with Paradigm throwing in $400 million. Sam Bankman-Fried was the richest person in the world under the age of 30 with a personal net worth of $26.5 billion.
Along the way they acquired 15 other companies in the crypto sector and splashed the cash on a long list of sponsorship, including the NBA’s Miami Heat basketball arena, MLB umpire uniforms, and F1 racing team Mercedes-AMG Petronas.
They also inked individual deals with names like Steph Curry, Tom Brady and Shohei Ohtani.
At the same time as he was turning FTX into a global crypto superpower, SBF was growing his net worth even further through operating his own crypto hedge fund - Alameda Research.
All in all, Bankman-Fried and FTX have had a big couple of years.
With the growth of FTX, Binance went from being a benevolent benefactor to a major competitor. With Binance still holding a large stack in FTX, they agreed to part ways for around $2 billion.
The catch was that Binance agreed to take a large portion of the buyout proceeds in the form of FTT, FTX’s own token that they use to fund trading fees on their platform.
This in and of itself has not been a problem. FTX has largely been seen as one of the strongest names in crypto and SBF is considered a very safe pair of hands in an industry filled with charlatans and scammers.
The unraveling of FTX
That is, until the co-founder and CEO of Binance, Changpeng Zhao (commonly referred to as ‘CZ’) announced on Twitter that SBF had been making unsubstantiated claims about Binance to the U.S. regulators, and as a result they would be selling their entire remaining $529 million worth of FTT.
As you’d expect, the prospect of a massive dump on the market sent investors running for the exits, and the price of FTT crashed. It fell over 30% almost instantly and caused a run on the platform, with massive delays and limits on investors trying to withdraw.
All of this risk has been compounded by the relationship with Alameda Research, which holds almost $6 billion of its total $14.6 billion assets in FTT. Or at least it did, the value of those assets are significantly lower now.
There’s a lot of detail left to shake out with this relationship, but there are some concerns about a less-than-arm's-length relationship between the two companies, allowing Alameda Research to gain access to real customer deposits in exchange for FTT deposits.
TL;DR - FTX is looking like a house of cards that's about to collapse.
Enter CZ. As we reported yesterday, Binance stepped in and offered to acquire FTX in order to stabilize the market and save the company, and their customers' deposits.
Importantly, the offer wasn’t binding, which meant that FTX would need to open their books to Binance to poke around and see what they had agreed to buy, before they fully committed to the deal.
It looked like calm had returned and that another industry crisis had been averted. But, it hadn’t.
Today, Binance announced that they’d be pulling out of the deal with rescue FTX. The reasons they offered for the change of heart were concerns about its business practices, as well as ongoing investigations from the U.S. regulators.
Basically, Binance felt they were about to take ownership of a live grenade, and they’ve tossed it back at the last second.
The future isn’t certain for FTX, but it certainly isn’t looking good.
FTX drama sends crypto crashing
With all of this drama, it’s not a shock that the crypto market has detonated. According to CoinDesk, Bitcoin hit a low of $15,710.72 late yesterday, a fall of over 25% from the end of last week. This takes Bitcoin's fall over the past year to almost 70%.
Other major digital currencies have performed just as badly, with Ethereum down 23% over the past five days and even Binance’s own currency BNB down over 18% over the same period.
Right now, we’re still waiting for the full shake out of the whole situation, but it’s fair to say that this is likely to cause shockwaves in the crypto sector for some time. The collapse of Terra, Three Arrows Capital, Celsius Network and Voyager Digital were all significant events, but they’re nothing compared to the size and reach of FTX.
What does this mean for investors?
Again we’re seeing a consistent reminder of the risks of crypto. When times are good, gains can be phenomenal. When times are bad, losses can be too.
This highlights the need for sufficient diversification for those investors who are prepared to take those risks. For individual investors who want to invest in crypto but want proper diversification, we’ve created the AI-powered Crypto Kit.
This kit utilizes cryptocurrency trusts to gain diversification across a wide range of digital assets such as Bitcoin, Solana, Litecoin, Bitcoin Cash and Chainlink. This allows you to manage your crypto alongside your mainstream stocks all in a single portfolio.
Better still, by using our AI portfolio you can let our AI predict your best risk-adjusted mix for the coming week, and then automatically adjust the amount you have in crypto and your other investments.
It’s like a hedge fund in your pocket, and we’ve made it available for everyone.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.
