Focus Turns to Alameda as Investors Fear Binance Deal Not the Answer for Stricken FTX
Evidence Emerges FTX Used FTT Token for $4B Bailout of Alameda in September
By: Samuel Haig •Dive
As cryptocurrency investors and users reckon with the fallout from Binance’s shocking takeover of FTX, one thing is clear: the episode is a disaster for the burgeoning industry.
“These events quickly sent the broader market into a tailspin, heaping more pressure on the prices of crypto,” Bobby Ong, the co-founder of CoinGecko, told The Defiant. “Collapses such as these only serve to erode the confidence of users and the general public towards the industry, and could become a hindrance to growing adoption.”
The questions now are how bad is it, and how long will it last?
Everywhere you looked in the wake of Binance’s announcement Tuesday that it had been asked to “help” its stricken archrival there was carnage. Ether has tumbled 27% in the last two days and is trading at $1,140, while Bitcoin skidded to $17,300 and fell 17%, according to The Defiant Terminal.
And Solana, which has close ties to FTX thanks to the derivatives exchange’s investment in the blockchain network, has plunged 43% in the last 24 hours. Many DeFi assets have touched monthly lows.
But their losses pale in comparison to FTT, the homegrown token at the heart of FTX business model and the cornerstone of financials at Alameda Research, the exchange’s closely linked crypto hedge fund. When news broke last week that the FTX-Alameda combine was dependent on a manufactured asset instead of an independent one such as Bitcoin or the U.S. dollar, confidence quickly eroded.
That’s because it was possible FTX was artificially bolstering Alameda’s trading book with its own currency.
‘Two big lessons. 1: Never use a token you created as collateral. 2: Don’t borrow if you run a crypto business… Have a large reserve.’CZTweet
On Tuesday, Lucas Nuzzi, the head of research and development at CoinMetrics, tweeted that on-chain FTT flows suggest FTX may have bailed out Alameda in September.
Nuzzi identified 173M FTT worth $4.2B that were transferred from the FTX Token’s vesting contract to Alameda, which were then immediately sent back to the smart contracts for FTX’s token.
“Here’s what I think happened: Alameda blew up in Q2 along with 3AC+ others,” Nuzzi posted. “It ONLY survived because it was able to secure funding from FTX using as ‘collateral’ the 172M FTT that was guaranteed to vest 4 months later.”
FTX did not immediately respond to requests for comment.
In the meantime, FTT has nosedived 79% since Tuesday, triggering so many withdrawal requests from investors Sam Bankman-Fried, FTX’s founder, was forced to apologize for delays.
“Our teams are working on clearing out the withdrawal backlog,” Bankman-Fried tweeted on Tuesday. “This is one of the main reasons we’ve asked Binance to come in.”
With $48B in daily trading volume, five-year-old Binance is the world’s No. 1 crypto exchange. Now it also appears to be its lender of last resort.
Changpeng Zhao, the billionaire CEO of Binance known as CZ, was quick to highlight weaknesses in FTX’s business model. “Two big lessons,” Zhao posted as the news unfolded. “1: Never use a token you created as collateral. 2: Don’t borrow if you run a crypto business… Have a large reserve.”
It was Binance that triggered the run on FTX’s reserves when CZ said his exchange planned to sell an FTT position of potentially $500M worth of the tokens. He suggested he didn’t have a choice after CoinDesk reported last week that 40% of Alameda Research’s balance sheet comprised FTT.
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On Tuesday, CZ had to manage the risk, but he also appeared to take a swipe at Bankman-Fried for his role as a self-styled ambassador for crypto in Washington D.C. Last month, SBF led an effort to develop “industry norms manual” and came under fire for appearing to support a bill that many entrepreneurs feared would damage DeFi.
“Liquidating our FTT is just post-exit risk management, learning from LUNA,” CZ tweeted, referring to the token at the heart of the failed Terra ecosystem. “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.”
Sense of Relief
The damage wrought by the episode goes further than falling token prices or squabbling crypto billionaires.
Cobie, the crypto influencer with 753,000 followers on Twitter, expressed the dismay many felt as they absorbed the news that FTX, a juggernaut long viewed as a steadfast source of strength in a volatile industry, was poleaxed in less than a week.
“In my decade of crypto, think this exchange rug is by far the worst ever,” Cobie tweeted. “Almost no time to react and lots of long-term and smart crypto ppl impacted by it.”
Still, crypto investors may find a sense of relief that Binance was poised to stabilize FTX and prevent it from collapse. That development would be far more damaging than the failure of Celsius earlier this year — FTX was valued at $32B after a fundraising round in January and regularly handled $10B in daily trading volume.
The rescue is far from a done deal. On Tuesday, Binance announced a “Letter of Intent” to acquire FTX yet no terms have been disclosed, and may very well be under negotiation. Skeptics say the deal may not ever happen.
“I think odds are Binance walks,” tweeted Adam Cochrane of Synthetix. “Heard from multiple more secondary sources that I have decent trust in… feels like 70%-80% that this doesn’t happen.”
While Bankman-Fried said yesterday that FTX’s U.S. units would not be sold to Binance, the deal may be subject to an antitrust review by regulators concerned about the concentration of two top players in the crypto market.
Thibault Schrepel, a law professor at VU Amsterdam, said CZ may have erred by tweeting about a deal prematurely.
“Check the compliance of your tweet with antitrust laws before you post,” Schrepel tweeted “At this stage, I wouldn’t be surprised to find this tweet in a forthcoming court document/antitrust litigation.”
Then there’s the issue of concentrated risk. Timo Lehes, the co-founder of Swarm, a crypto trading and staking platform, said Binance will be “too big to fail” should it acquire FTX. And regulators don’t like that.
‘I think odds are Binance walks. Heard from multiple more secondary sources that I have decent trust in… feels like 70%-80% that this doesn’t happen.’Adam CochraneTweet
“Their success is now crucial to the systemic operations of the crypto industry, given that more than half of global spot trades and a large chunk of crypto derivatives business is transacted across both exchanges,” Lehes said. “If the deal does go through, a consolidation of this size will be unprecedented in the crypto space.”
The crisis began last weekend when CoinDesk reported that 40% of Alameda’s balance sheet comprised a $5.8B stash of FTT on June 30, including $2.2B earmarked as collateral for some of its $7.4B in loans.
With FTT’s circulating supply sitting at $3.3B that same day, Alameda’s FTT holdings are far too large to liquidate without crashing the market, calling into question the firm’s ability to meet its debts.
FTX users reacted by pulling their funds from the platform in droves. According to data from Dune Analytics, the exchange’s reserves dropped by more than $1B in seven days. Users withdrew $600M in just the past 24 hours.
The liquidity crunch prompted Alameda to funnel hundreds of millions into FTX, escalating concerns that Alameda’s financial woes could be intimately entangled with FTX and accelerating withdrawal requests. Alameda began gathering funds from anywhere it could, making matters worse as onlookers speculated the firm was running out of liquid assets.
The episode is a sobering development for some of the most respected names in investing, which acquired equity stakes in FTX as a way to explore crypto. Among them: BlackRock, the No. 1 global asset manager, Tiger Global, the hedge fund led by billionaire Chase Coleman, and Temasek, the Singapore government’s sovereign investment fund. And top venture capitalist firms — Sequoia, Lightspeed, Paradigm — are also facing serious losses if FTX is sold to Binance at a fire sale price.
As for FTX users, many appear worried about their balances.
“I know someone who is interested in selling his FTX balance at 93 cents on the dollar,” tweeted Twitter influencer Haralabob.
Investors also questioned Alameda’s solvency and the identity of its creditors.
Alameda’s $5.8B stash of FTT would be worth around $1.4B today — which would amount to two-thirds of the value of its holdings using the 40% measure on loan collateral recorded June 30.
The quantitative hedge fund’s investors want to know who Alameda’s counterparties are on the other sides of its trades, and how are those positions structured and collateralized? Will a wave of margin calls sink the fund because FTT has cratered?
“The biggest question that currently remains unanswered is how lenders are faring right now,” Marius Ciubotariu, a Solana dev, said. “The fear is that this could cause loans to fall like dominoes across the cryptocurrency market.”
“The fallout will be long and unseen,” tweeted Avi Felman, Head of Digital Asset Trading · GoldenTree Asset Management. “There are likely further losses yet discovered, lending desks, etc.”
Ironically enough, SBF warned in June that some cryptocurrency exchanges were continuing to operate despite being “secretly insolvent” amid the failure of centralized crypto lender Celsius and the Terra blockchain ecosystem.
Now as the import of the FTX situation sinks in, the market is confronting the reality that one of its most influential institutions may not have practiced what it preached.
“The fact that FTXneeded saving in the first place is extremely detrimental to the whole space,” said Kiril Nikolov, a sales executive at Nexo, a crypto investment firm with $15B in assets under management. “As one of the main driving forces that pushed the whole space forward during the bull run, a FTX buyout has potential implications for tens of thousands of users and hundreds of projects.”
— With reporting assistance by Aleksandar Gilbert