- FTT, the native coin of cryptocurrency exchange FTX, crashed 75% and plugged below $5, wiping out more than $2 billion in a day.
- Bitcoin dropped more than 10% and hit the lowest level since November 2020, trading under $18,000 (INR 15 lakh), and altcoins such as Dogecoin, Cardano, Solana and XRP fell more than 10%.
- The overall market cap of the market slid under $1 trillion again and is now below $900 billion for the first time after 2021.
- Binance, the world’s largest cryptocurrency firm, announced plans to acquire rival exchange, FTX.
- The agreement between Binance and FTX to acquire its non-U.S. operations is non-binding with pending due diligence.
Just when the Indian cryptocurrency markets started recovering from the Luna and Terra crash, new crypto tax regulation in India and regulatory tightening leading to payment issues, the FTX crash added fuel to the fire. With the FTT fallout, the possibility of liquidity crunch in the cryptocurrency space with the potential to cause catastrophic losses of value as never before has arisen. The global crypto ecosystem is rocked with the news of the near collapse of one of the largest crypto exchanges, FTX and its ongoing controversial deal with Binance.
Here’s a break up of what is happening with FTT liquidity issues and how it will affect Indian crypto investors.
What Is The FTX-Binance deal?
A 30-year-old billionaire and the stalwart of the crypto market and FTX’s founder, Sam Bankman-Fried, shocked the digital assets industry, as he announced that his cryptocurrency exchange FTX is going to be acquired by their biggest rival exchange Binance. Reports suggest FTX is facing a massive liquidity crunch, which meant the exchange did not have enough money to run its business operations anymore. Sell-offs of FTT tokens by Binance worsened the situation.
Binance CEO, Changpeng Zhao, announced via twitter that Binance would sell its holdings of FTX’s digital token, known as FTT. FTT has now struck a bailout deal with Binance to give away FTX’s non-U.S. operations.
Why Does FTT Sell-Off Matters?
The world’s second-largest exchange and a multi-dollar company, FTX, got secretly insolvent which not just pulled down its native token by almost 75% but also triggered a crash of other crypto coins. The FTT sell-off matters as FTX was among the biggest huge players in the cryptocurrency market worldwide and also one of the largest crypto exchanges of India. Quite recently, it surpassed Coinbase to become the second largest crypto exchange in the world, just after Binance.
It is pertinent to note the Binance-FTX deal will affect only the non-U.S. businesses of FTX and Binance.
The FTT sell-off has also brought to light key concerns related to transparency and regulation of cryptocurrency exchanges including how fractional reserves of exchanges were compromised to be able to pay for the operational expenses of the company. Binance CEO, Zhao, suggested “all crypto exchanges should do merkle-tree proof-of-reserves, and banks run on fractional reserves; crypto exchanges should not,” in a tweet following the takeover announcement.
Crypto Market Crashes
FTX’s insolvency and its mega deal announcement with Binance has sent shockwaves of fear, uncertainty and ambiguity across the crypto market worldwide.
The FTT collapse cast a shadow over the performance of bigger cryptocurrencies such as Bitcoin and Ethereum. Bitcoin, the largest cryptocurrency, is trading at an almost two-year low below $18,000 (INR 15 lakh), as of November 9, 2022. Ethereum dropped almost 7% in a day and trading below $1300 (INR 1 lakh).
Many other cryptocurrencies such as altcoins including Dogecoin, Ripple, Solana and Cardano have also plummeted heavily and showing double-digit losses. Whereas, FTX’s native token FTT crashed almost 75% in just one day.
Crypto spectators were quick to point out that liquidation of FTT holdings by a large player like Binance might cause market disruptions if FTX-affiliated fund Alameda’s balance sheet became illiquid.
Should Indian Crypto Investors Worry?
The FTX downfall can be considered as a wakeup call for all crypto investors who have apprehensions about the valuation of the digital assets and upon the functioning of crypto exchanges.
Experts say that the Indian crypto investors are in a wait and watch mode. As the terms and conditions of the FTX-Binance deal lack the transparency needed, they suggest it may not be advisable to take any new positions.
Among the biggest worries is that the wipe-off due to the FTX and Binance deal might stretch across other asset classes, not just cryptocurrencies. Rajagopal Menon, vice president of India’s largest cryptocurrency exchange WazirX, fears the worst might not be over yet, and anything can happen.
“This is a worrying development for the industry already in the middle of a bear market. The general feeling was that we had hit bottom, and the only way was up. Now the market has to deal with this new unknown..,” said Menon in a press note.
The chief operating officer and founder at KoinX, Punit Agarwal, voiced similar concerns and said the sudden news has affected the Indian ecosystem deeply.
Agarwal’s main concern was the majority of the exchanges had FTT tokens and due to the sudden drop in price, all users are now at a loss.
Amanjot Malhotra, India country head of Bitay, thinks the FTT crash can start a snowball effect in liquidations as the lenders to FTX could also go down alongside them taking the investors down with them as well. “We can see a lot of other companies and projects liquidating or declaring bankruptcy.”
He fears a lot of retail investors might go inactive for a while due to the current volatility in the market, on the other hand, institutional investors might like to capitalize on discounted assets at the moment and hedge their investments.
In Malhotra’s view, this event will somehow make other exchanges more powerful and investors might like to convert their altcoins into Bitcoin, Ethereum, and other stablecoins and put them in a cold wallet till the point the market stabilizes.
With the overall market cap of the market sliding under $1 trillion again and below $900 billion for the first time after 2021, only time can only tell if investor concerns are short-term or will impact the market for much longer.