What is the problem; Why did bitcoin drop today?
Cryptocurrencies, including Bitcoin, Ethereum and Polygon, are seeing massive selling with some dropping as much as 16 percent in 24 hours. Cryptocurrencies are plummeting due to the financial crisis on the major cryptocurrency exchange FTX, and the situation has worsened after the Binance-FTX bailout deal unraveled.
What is the problem?
The decline in cryptocurrencies began earlier this week when crypto exchange FTX experienced financial problems. FTX, which ranks among the world’s five largest crypto exchanges, is facing a liquidity crunch and its CEO Sam Bankman-Fried (also known as SBF) has told investors that the company is facing an $8 billion drawdown shortfall. It is asking for and needs emergency funding, according to the Wall Street Journal.
FTX CEO Sam Bankman-Fried said Wednesday that without a cash injection, bankruptcy is likely. On the night of November 7, amid a liquidity crunch, Bankman-Fried was seeking to raise money from venture capitalists and other investors. FTX earlier this year was valued at $32 billion by private investors.
There are also reports of mismanagement of client funds. The US Department of Justice will launch an investigation into the FTX.
Binance-FTX Trade Failed
Since FTX CEO Bankman-Fried has been reaching out to investors to raise funds, he has also gone to Binance, which is already a significant investor in FTX. Binance CEO Changpeng Zhao (also known as CZ) has agreed to the bailout and announced that he has reached a non-binding deal to buy non-US FTX firms for an undisclosed amount.
However, a day after the announcement, the CEO of Binance took a detour and said, “The issues are beyond our control or our ability to help.” This reversal shook the cryptocurrency market as it pointed to the uncertainty in the cryptocurrency world.
In its statement on Wednesday, Binance said: “As a result of corporate due diligence, as well as the latest news reports regarding mishandled client funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com. Initially, it was our hope that we would be able to FTX customer support to provide liquidity, but issues are beyond our control or our ability to help.”
Binance’s Changpeng Zhao has also publicly said that he will sell his holdings in FTX, which has caused the company’s FTT cryptocurrency to plunge 80 percent in value between Monday and Tuesday to $5 and wipe out more than $2 billion a day.
The Journey of FTX and Binance Together
Binance invested in FTX in 2019 when the latter was a derivatives exchange. The following year, in 2020, Binance launched its own crypto-derivatives and later became a leader in the sector.
The problems started after the two companies got stuck on regulatory issues. Bankman-Fried was testifying in the US Congress, while Binance is said to be facing regulatory investigations around the world.
CZ and the SBF have been exchanging barbs on Twitter for months, squabbling over issues ranging from pressure on US politicians to allegations of deal-trading.
Where is the crisis heading?
The liquidity crunch has created solvency risks for FTX. FTX CEO Sam Bankman-Fried said Wednesday that without a cash injection, bankruptcy is likely.
Sequoia Capital has reduced its investment to $0. “The full nature and extent of this risk are currently unknown. Based on our current understanding, we are reducing our investment to $0,” she said in a statement Thursday.
She said Sequoia Capital’s exposure to FTX is limited. “We take risks… at the time of our investment in FTX, we went through a rigorous diligence process. In 2021, the year of our investment, FTX generated approximately $1 billion in revenue and over $250 million in operating income, as announced in August 2022.”
Bitcoin is down about 16 percent amid the fiasco, while Ethereum and XRP are down 12 percent. Polygon was trading down about 7 percent. Ether was also down about 13 percent.
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