FxBrokerReviews.org – Cryptocurrencies like Bitcoin, Ethereum, and Polygon, are all experiencing significant sell-offs, with some falling by as much as 16% in a single day. The financial crisis at FTX, a major crypto exchange, is causing the price of cryptocurrencies to decrease, and the problem was made worse when the rescue agreement between Binance and FTX fell apart.
What’s The Problem?
When crypto exchange FTX encountered financial difficulties earlier this week, the decline in cryptocurrency prices began. According to The Wall Street Journal, FTX, one of the top five cryptocurrency exchanges in the world, is experiencing a liquidity crisis. According to its CEO Sam Bankman-Fried (also known as SBF), the company could experience an $8 billion shortfall due to withdrawal requests and urgently needs funding.
FTX CEO Sam Bankman-Fried states bankruptcy is likely without a capital infusion. Amid the liquidity crisis on November 7 night, Bankman-Fried was frantically seeking funding from venture capitalists and other investors. Earlier this year, private investors gave FTX a $32 billion valuation.
There have also been reports of improper handling of consumer payments. An investigation into FTX will begin by the US Department of Justice.
The Binance-FTX Deal Failed
In addition to pursuing investors for funding, FTX CEO Bankman-Fried went to Binance, which is already a sizable investor in FTX. The rescue was then approved, and Changpeng Zhao, the CEO of Binance (commonly known as CZ), declared that he had struck a non-binding agreement to purchase FTX’s non-US businesses for an undisclosed sum.
The Binance CEO reversed course, saying, “the challenges are beyond our control or ability to help,” a day after the statement “. This turnaround shook the cryptocurrency market since it highlighted the industry’s unpredictability.
In a statement released on Wednesday, Binance said: “We have decided not to pursue the prospective acquisition of FTX.com as a consequence of corporate due diligence and the most recent press reports about improper handling of customer cash and suspected US agency investigations. Our initial intention was to be able to assist FTX’s clients in providing liquidity. However, the problems are outside of our control or realm of influence.”
Additionally, Binance’s Changpeng Zhao made it known that he would sell his FTX holdings, which shook the market and caused FTT, the company’s cryptocurrency token, to lose up to 80% of its value between Monday and Tuesday, dropping to $5 and wiping out more than $2 billion in a single day.
Also read: How To Start Cryptocurrency Trading?
Journey Of FTX And Binance Together
2019 saw Binance invest in FTX, a derivatives exchange at the time. 2020 saw the birth of Binance’s cryptocurrency derivatives, which went on to establish it as the market leader.
After the two companies became embroiled in regulatory matters, problems began. While Bankman-Fried was testifying before the US Congress, Binance was reportedly under regulatory investigation worldwide.
For months, CZ and SBF have been exchanging insults on Twitter, arguing about everything from lobbying US politicians to claims of frontrunning trades.
What Way Is The Crisis Going?
For FTX, the liquidity issue has increased the danger of solvency. FTX CEO Sam Bankman-Fried states bankruptcy is likely without a capital infusion.
Sequoia Capital reduced its investment to zero dollars. “The full nature and scope of this risk are not understood at this time,” stated Thursday’s statement. We are writing off our investment to zero based on our existing knowledge.
The exposure of Sequoia Capital to FTX, it was said, is modest. “We are in the risk-taking business… When we decided to invest in FTX, we conducted a thorough due diligence procedure. According to information made public in August 2022, FTX generated roughly $1 billion in revenue and more than $250 million in operating income in 2021, the year we invested.
Selling Off For Cryptocurrency
Amid the mess, Bitcoin fell by about 16%, Ethereum by 12%, and XRP by 12%. Trading for Polygon was down about 7%. Ether also experienced a 13% decline.
Bankruptcy Is Imminent
Bankman-Fried threatened bankruptcy if he couldn’t get a bailout, citing an $8 billion gap and the lack of suitors. Customers of FTX drew analogies between the prospect and the bankruptcy filings of Voyager Digital and Celsius Network, two cryptocurrency platforms, earlier this year.
Customers of Celsius and Voyager have been unable to access their accounts for months, and because of this, they were made creditors in the legal processes. They must contend with other creditors for a piece of the company’s assets.
Challenging legal issues over how cryptocurrency should be handled when an exchange fails have slowed down such proceedings. Additionally, there are few legal precedents regarding how clients fare in a crypto bankruptcy where there needs to be more money.
Not only FTX customers could be harmed by Bankman-failure. Fried’s As part of his troubled crypto purchasing spree, the billionaire promised to save Voyager in a $1.4 billion deal in September, although the agreement has yet to be finalised. On Thursday, Voyager declined to comment on the deal’s progress.
Investors who hoped Bankman-Fried would assist them in recovering their money are worried because it’s probably gone. Even FTX US, an independent US-based organisation from FTX.com, warned that trade might be halted for a few days.
When the Voyager platform stopped allowing withdrawals, John Gould, a 45-year-old software developer from Birmingham, Alabama, had around $2,000 in his account, mainly in alternative currencies. He was hopeful he would be able to pay out when FTX first said it would buy Voyager’s assets, but he doesn’t believe that will happen anymore.
He said, “It’s kind of like a domino effect.” It has undoubtedly damaged my confidence in transactions.
Giving Up Exchanges
Retail investors who intend to continue investing in cryptocurrencies claim they are shifting their tokens to offline wallets because they no longer trust the exchanges.
Travis Woo in Hawaii removed his cryptocurrency from FTX on Sunday after hearing concerns of impending turmoil. After seeing Voyager and Celsius go down, he realised he needed to get his money out as soon as possible. Stablecoins worth about $25,000 that the 32-year-old full-time trader had on FTX is now being kept on a ledger.
Woo stated, “I think this is the worst thing ever to crypto.” The phrase “nail in the coffin” comes to mind. In light of this, it isn’t secure to hold money on exchanges.
Jonathan Wallace in Tupelo, Mississippi, feels the same way. The 41-year-old owner of a small insurance company had recently transferred $1,500 in Bitcoin onto FTX, lured by the possibility of receiving an 8% annual yield on his investments. His friends encouraged him to invest with FTX, but “then it just crashed,” he claimed.
What Will Happen To FTX After That
Bankman-Fried stated that he is attempting to raise cash from various financial institutions to alleviate the capital gap. Doing the right thing for users is, by far, my top concern, he declared.
In the end, FTX has two options for escaping the issue, according to Yermack of New York University. As it did in its bid to merge with Binance, FTX could first try to sell itself to another company.