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For once this year, this letter will not begin with a contextualization of the macroeconomic elements affecting all markets in one specific direction. On the contrary, it was a new crypto-specific crisis that rocked the markets yesterday. While cryptocurrencies continued their gradual rebound along with equity markets, it was a saga involving Sam Bankman-Fried’s (SBF) giant FTX exchange – a crisis that could have made LUNA and Celsius seem second in comparison – which pushed the markets to the precipice. Let’s reserve this communication to explain exactly what happened. While the story is certainly worrying for short-term investors, it remains no less compelling at the business level despite the significant and unfortunate financial impact.

Source: AdobeStock / Rafael Henrique

First let’s put things in context. Binance is by far the most popular and profitable exchange in the cryptocurrency market. Its closest competition, however, was that of FTX, a multi-billion dollar company. It is these two titans who have been rubbing their shoulders this week.

Binance predates the existence of FTX. Several years ago, Binance was one of the first investors in the FTX start-up. Bankman-Fried’s growth strategies, however, quickly paid off in a favorable market, with the exchange growing at breakneck speed to become 2And in market share, therefore a direct competitor of Binance. During the most recent crises, SBF always seems to be involved, trying to buy bankrupt entities. Just a few months ago, he was looming as the possible savior of the industry. Fortune magazine has gone so far as to call him a possible future Warren Buffett, no less.

In this context in which the two exchanges are now direct competitors, Binance decides to sell its shares in FTX. As part of the terms of the transaction, Binance agrees to receive the equivalent of $ 2 billion in FTT tokens, the native token of FTX. This token was still worth $ 22 at the start of yesterday. However, it is important to know that FTT does not have the transaction volume of a token like BNB (Binance’s native token).

Then, the day before yesterday, Binance CEO Changpeng Zhao (CZ) publicly states that SBF talks badly about him to various regulators, trying to “crack down” on his competitor to the possible detriment of the health of the industry in general. As a result, he announces to his 7 million Twitter followers that he is about to sell his $ 2 billion FTT token on the open market. The message to token holders couldn’t be clearer and more disturbing. This selling pressure for a token of this volume and in an atmosphere of uncertainty is enough to completely crush its price. Panic is gripping the markets. Everyone wants to sell their FTTs, but no buyer rushes to the door. The price, of course, drops significantly.

Enter Alameda, a parent company of FTX and owned by SBF. This is a Market maker which officially holds $ 12 billion in assets and $ 7 billion in liabilities. However, half of the assets are made up of FTT tokens whose price is plummeting and whose market offers no liquidity. During the night, the company appears life threatening. Alameda offers Binance to purchase all of its FTT tokens for $ 22 each, but CZ does not intend to accept it, saying that it prefers to use free market forces instead. If Alameda suddenly faces such a risk, what about FTX, the same company behind the FTT token? SBF may send a message that all is well and client assets are safe, but investors remember the recent sagas all too well. They are pushing doors to remove all their crypto assets from FTX. The exchange faces more than $ 1 billion in withdrawals. A real liquidity crisis. A run to the bank modern.

Instead of reassuring the members of the exchange, FTX instead announces a freeze on withdrawals. The panic reaches a climax. We quickly learn that there are no more bitcoins to withdraw from FTX reserves.

Then, suddenly, an absolutely unimaginable announcement from a few days ago falls. Binance buys FTX to get them out of trouble and protect client assets. Markets clap for a moment at the news with a strong rebound, before the dust settles. The worst case scenario appears to have been avoided for the time being. However, the price of an FTT token is now only worth $ 4.20, a drop of more than 80% in 24 hours. All those who use it as collateral suddenly find themselves facing a critical situation, having to sell more of their assets such as BTC and ETH. Once again the lever of some market participants suddenly in crisis creates downward pressure on prices. Furthermore, we find ourselves with a suddenly very centralized commercial market. Additionally, Binance’s FTX purchase agreement has not yet been signed and is subject to prior due diligence review. However, CZ is now alone in the driver’s seat. What will it do? FTX’s death is still not entirely impossible. We know that markets hate uncertainty.

If you like the crude forces of capitalism, this story has something to surprise you, despite its fleeting price implications. Within days, Binance launched a rumor, made a public threat, leading to the purchase of its biggest rival for perhaps pennies on the dollar. A real hostile purchase among the giants of the sector.

Note that the acquisition only affects the non-US business, will remain independent of Binance. However, according to a 2021 audit, the US portion of FTX accounted for only 5% of revenue.

Later on Tuesday, CZ tweeted that he believes “all cryptocurrency exchanges should use proof of merkle tree reserves.” In the same tweet, he added that while banks operate on fractional reserves, cryptocurrency exchanges shouldn’t. Zhao also later claimed that Binance has never used BNB as collateral and that he believes no exchange should use its native token as collateral. History has already shown us three times instead of once in 2022 …

For Sam Bankman-Fried, it’s what you might sarcastically call a bad day at the office. In 24 hours, the CEO of FTX lost about $ 14.6 billion, or nearly 94% of his total wealth, according to the Bloomberg Billionaires Index. In fact, he’s no longer on that list. SBF, 30, said his company would be big enough last year to buy Goldman Sachs. He can forget it. The 94% loss is the biggest one-day crisis ever for billionaires.

It goes without saying that this saga continues to lead the markets. The price of bitcoin, which was still doing well last week, painted a new yearly low. Will this acquisition make it possible to quickly overcome this crisis and return to the level of the last few weeks? After all, the fundamental value of bitcoin and Ether has certainly not changed. It is the level of uncertainty that has increased. On the contrary, will other pages of this history be written, with consequences that are impossible to predict today? As one famous analyst put it: “The stocks are doing well. An event black Swan ruined the price action for cryptocurrencies, but once the taste is out of people’s mouths, we should see $ BTC and $ ETH do a little rally. Again, the problem is not the assets themselves “.

Volatility will surely be present for some time to come. Tomorrow was already foreshadowed as such with US consumer price index data for October.

As for the fund, we were overweight in ETH at the start of this crisis, which certainly didn’t help. On the other hand, we reacted quickly to transfer these assets to BTC during the first sell-off, and then increase liquidity during the second. We believe our losses over the past 24 hours are equivalent to those of BTC, despite our initial position in ETH. We are therefore currently defensively positioned with a higher liquidity level.

This article was brought to you by Fonds Rivemont. The Rivemont cryptocurrency fund is the first and only actively managed cryptocurrency fund in Canada. Suitable for RRSP and TFSA. Accredited investors can find out more here.

Disclaimer: This column does not necessarily reflect the opinion of CryptonewsFR and does not constitute investment advice or trading instructions..

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