Will FTX survive or become the next Luna

One of the biggest crypto giants, FTX, is in a nosedive. In just three days, the exchange has suffered enormous losses, bringing down the value of its proprietary digital asset, the FTX Token (FTT), has lost the majority of its value in just two days. From $22 per token on November 8, to about just $2.2 at the time of writing – November 10, it seems highly likely the company will collapse. What triggered this incredible fall and is there a chance that FXT will bounce back? Or will the company join the likes of Luna and Coinbase in the list of crypto market leaders who go insolvent in 2022? Let’s find out:

The issues with the Alameda balance sheet

There is much talk about crypto exchanges being insolvent these days. And that is only natural, in the wake of Luna’s crash. So when, in early November, it was revealed that might be the case with FTX as well, many were concerned.

The company was founded by Sam Bankman-Fried – a billionaire who also founded Alameda Research, a trading firm. It was found that the Alameda balance sheet consisted mainly of FTT tokens, minted on the exchange. Out of $14.6 billion in total assets, it was discovered $5.82 consisted of the asset. There was also a large amount of liabilities, with a staggering $7.4 billion in loans. That raised a lot of concern for the liquidity of both the trading firm and the exchange itself, as it seemed to be backed by the coins that it made on its own.

FTT tokens take a nosedive

Unfortunately, the following days were catastrophic for the exchange. Amongst rising fear within traders, caused by the concerns mentioned above, a bank run began from it on November 8. The value of the tokens started spiraling and has crashed hard. This means the value of the $5.82 billion held in the token has caused a large gap in the balance sheet of Alameda, but also in the exchange as well. All crypto withdrawals from the company were halted the same day.

Sam Bankman-Fried had to take drastic measures and reach out for help from one of the main rivals of his companies – Binance CEO Changpeng Zhao. The two signed a non-binding agreement that would lead to the acquisition of the FTX exchange by Binance.

Will Binance bail out FTX?

That is still undecided at the time of writing. Unfortunately for Bankman-Fried, the answer seems to be inconclusive. On November 9, Zhao posted a tweet, which reveals an internal note sent to his team. The crash of FTX should not be seen as a “win for us”, the Binance CEO writes. He also encourages his colleagues to not sell the FTT tokens they have, as to not undermine the struggling firm further. At the same time, there is no indication that his company is actually moving towards with the acquisition. In fact, Coinbase reports that it is moving the other way – after a quick look at the FTX books, the deal seems to be getting scrapped.

This would be an incredibly significant event. FTX failing would also mean Alameda failing as well – there was never any intent from Binance to acquire it, but with the majority of its portfolio having tanked, going further will surely mean the death of the venture. However, even though nothing is certain as of yet, the crash has already started sending ripples in the crypto space:

The fallout of these events

In his tweet, Zhao also expresses concerns that the trust of the retail consumer in the industry is now severely shaken. And we can certainly see that – the price of every major digital asset was in the red the day after the FTX death spiral began. The largest one, BTC has lost over 24% of its value within a week, bringing it under $17 000 for the first time in two years, as that was the price of the asset towards the end of 2020. The leaders of the crypto industry are hoping the “Alameda Contagion” as they have dubbed it is contained, as it is posed to set the industry backwards if it is not.

Another concern expressed by the Binance CEO is that regulatory bodies would step up and take action against crypto firms. Getting licenses would get more difficult, according to him. This is a logical outcome – with not only the trust of retail investors in the safety of the assets, but also that of governments worldwide being undermined by such large-scale crashes. This kind of loss of confidence led to the UK becoming the first country to ban the provision of crypto derivatives to its citizens. UK forex brokers are not allowed to offer crypto CFDs to retail clients and the crashes in 2022 may end up leading to even more drastic restrictions in the future. 

Where have we seen this before?

The crash of the company is unfortunately not unprecedented. In May 2022, a stablecoin called Luna has crashed, creating an estimated $60 billion wipeout. To date, this is the biggest crypto crash. The insolvency of the firm created many issues, as the price of the major assets on the market crashed once again, causing over $300 billion in losses. The founder of Terra, the company behind the asset is now fleeing from the law in an unknown location. There is an arrest warrant issued against him, as his native South Korean prosecution seeks to charge him with large-scale financial crime.

The fallout of that crash cannot be understated. It has shown the underlying issues with algorithmic stablecoins – and the same was true of Celsius as well. The poor decisions of the company led to it filing for bankruptcy in a US court. This means a long judicial process is now taking place to determine who gets what from the company. It is expected that the company’s case will take months, or even years. However, the retail investors within it are not likely to see much of their funds. The company had them listed as one of the last creditors that would be made whole in the case of a bankruptcy. If all of its assets are liquidated, it is not clear if there will be anything left for such creditors. At the end of the day, the retail client seems to be the one to pick up the tab from these crashes.