Yesterday, the co-founder and CEO of Binance, Changpeng CZ Zhao, publicly stated that he intends to get rid of the crypto of FTX in his portfolio.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.
— CZ 🔶 Binance (@cz_binance) November 6, 2022
CZ’s written words sound decidedly harsh, so much so that he likens the current situation to that of the implosion of the Terra/Luna ecosystem.
CZ also posted the link to the on-chain transaction regarding 23 million FTT tokens moved to Binance’s wallet.
Yes, this is part of it. https://t.co/TnMSqRTutr
— CZ 🔶 Binance (@cz_binance) November 6, 2022
This is over $584 million at current exchange rates, so the transaction is definitely of significant size.
The price of the FTT crypto (FTX) following Binance CEO’s statement
Yesterday, the price of FTT, the token of FTX, dropped in a few hours from $25.5 to $22, then briefly rose again. As of now it is back to $22.
This is not a random figure, because it is the same price at which Alameda Research yesterday committed to buy the tokens that Binance decided to sell.
@cz_binance if you're looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!
— Caroline (@carolinecapital) November 6, 2022
Right now the price of FTT is 14% lower than it was a week ago, but only 9% lower than it was a month ago. So the feared collapse for now has not happened.
Compared to the all-time highs of September 2021 it is down 73%, which is in line with the losses of many other cryptocurrencies that are still solid.
It is worth noting that before the implosion of the Terra ecosystem it was above $39, which is a significantly higher figure than it is now, but not by much.
In short, thanks to the Alameda CEO’s statements, the price of FTT actually held yesterday.
Alameda Research is a quantitative trading firm founded in 2017 by Sam Bankman-Fried. Sam Bankman-Fried, commonly referred to as SBF, founded the crypto exchange FTX, one of the largest in the world, in 2019.
Starting in 2021, SBF owns about 90% of Alameda Research.
The company’s current CEO is American trader Caroline Ellison, which is the same person who publicly responded to CZ telling him that Alameda was ready to buy all of Binance’s FTT tokens at a price of $22.
The crux of the matter is precisely Alameda Research.
Rumors have been circulating for days that the company may be insolvent. Statements by CEO Ellison yesterday would suggest otherwise, but rumors of Alameda’s possible insolvency made the rounds on social media yesterday.
It all starts with the company’s official balance sheet. As of 30 June it was reported to own $14.6 billion in assets, much of which, however, was in FTT tokens. At the time, its market value was $24.
FTT is a token created and issued by FTX, which is SBF’s other company.
Why Binance wants to liquidate the crypto of FTX
The thing is, in total the company had $5.8 billion in FTT, but it also had $7.4 billion in loans. Indeed, it was practically able to borrow this money because of the collateral provided by the FTT tokens created by its sister company.
However, the biggest problem is another, which is the fact that there are only 133 million FTT tokens in circulation in the crypto markets, while a total of 328 million have been created. The difference is the tokens owned and budgeted by Alameda, and used as collateral to obtain loans.
Moreover, not only does Alameda turn out to own 180% of the outstanding supply of FTT tokens, but 93% of these are concentrated in just 10 on-chain addresses.
In addition, Messari also pointed out that only about 200 addresses conduct active transactions in FTT tokens.
One of these operators is the same FTX exchange that regularly buys FTT tokens on the market thereby spending 33% of the commissions collected on their users’ trading activity.
The risk is that this is a colossal house of cards ready to come crashing down at the first major problem.
CZ’s words also seem to support this hypothesis, although yesterday a big problem occurred and the price of FTT held up.
The crypto ecosystem
If there are problems at FTX then the entire crypto ecosystem could suffer, as happened in June with Celsius.
In other words, it is not just a matter of one company having more or less serious financial problems, but the risk of a systemic collapse like the one in June.
However, it is worth mentioning that as much as the June collapse was indeed systemic, it was not a true total collapse.
The total collapse was that of Celsius, such that the company later went bankrupt, but the crypto markets after the collapse recovered.
These kinds of events are not that uncommon in crypto markets. They have happened several times before, and although they have caused very strong shocks, they have never really challenged the very existence of cryptocurrencies and crypto markets.
On the contrary, especially Bitcoin and Ethereum over the years have shown remarkable resilience even in the face of such earth-shattering events, so much so that in 2018, for example, ETH managed to recover from a -95% drop.
Sam Bankman-Fried, also known as SBF
Sam Bankman-Fried was born in 1992, so he is only 30 years old.
He became a professional trader at 21, and at 25 he founded Alameda Research. The crypto exchange FTX was founded when he was 27, so this is not someone with decades of experience in managing large financial firms.
Moreover, he got rich very quickly, to the point that as of today he is by far one of the richest people in the world in crypto.
According to data collected by Forbes and Bloomberg, his wealth comes mainly from the FTX exchange, and not from previous trading activity.
Because of this, there are those who speculate that he got rich through accounting tricks that allowed his companies to create tokens out of thin air, placing only a portion of them on the market so that they would acquire value and then use those that were held aside as collateral to obtain loans.
Although this is only a hypothesis, the accounting data in Alameda Research’s financial statements actually seem to suggest a somewhat similar picture.
The possible insolvency of FTX
In such a scenario, if the market price of FTT tokens were to fall a great deal, due to an increase in selling pressure not matched by an adequate increase in buying pressure, the value of loan collateral could fall too much.
If at this point the creditors were to demand immediate repayment of the loans, the company might find it difficult to sustain all the outflows, precisely due to the fact that if it sold its FTT in the market it would only increase the collapse in price.
The company, however, points out that it already has sufficient collateral, thanks to hedging positions in derivative products, so it should be able to sustain any situation.
It also points out that this data has been around for some time, so it seems at least curious that the problem seems to have erupted only yesterday.
In reality, it was Binance, i.e. a competitor of FTX, that caused the problem to detonate yesterday. It is not known whether there is good blood between the two exchanges, but CZ’s words yesterday suggest that they recently came into possession of information that may have painted a rapidly changing picture.