FTX Crisis Shifts Into New Phase as Contagion Spreads

Twelve hours after Binance nixed hopes of a tidy bailout of FTX, turmoil rages in the crypto markets.

Digital assets are hitting new lows, a potential savior has emerged in the form of Tron’s Justin Sun, and fears are mounting that more damage is to come as authorities circle the stricken exchange and its sister firm, Alameda Research.

Lowest Level

The FTX disaster worsened Wednesday after Bloomberg News reported that the U.S. Justice Department and the U.S. Securities and Exchange Commission are investigating FTX’s handling of customer funds, citing unnamed sources familiar with the matter.

On Wednesday, Ethereum dropped to its lowest level since July, bouncing off a low of $1,060. Bitcoin plunged to levels not seen since November 2020 when it tagged $15,600. Ether has since rebounded 11%, while BTC is up 7.5%.

Contagion

No surprise, FTT, the token manufactured by FTX and the linchpin of the balance sheet at Alameda Research, has lost more than 90% of its value in the last 72 hours.

Solana, which received investments from FTX and Alameda, is now paying a steep price as contagion triggered a 66% selloff this week. Crypto rebounded, though, on Thursday after the U.S. government released data showing inflation in October had fallen the most since January.

FTT/USDT on Binance, 30 min chart. Source: TradingView

More probes are under way. The Texas State Securities Board is investigating whether FTX’s yield-bearing products comprise unregistered securities products, according to court filings.

And even as Bankman-Fried is scrambling for capital infusions to stave off bankruptcy at FTX, Sequoia Capital, one of the prestigious venture capital firms that invested in in the exchange, sent a sobering letter to its clients. “based on our current understanding, we are marking our investment down to zero,” said the letter. The firm said it was writing off $150M.

Meanwhile, FTX and Alameda and their leader, Sam Bankman-Fried, have gone silent, with no communications on their social media feeds. FTX did not respond to requests for comment.

Ray of Hope

One ray of hope did emerge late Wednesday: Justin Sun, the head of Tron Network. TronDAO, its governance arm, pledged to redeem trapped Tron tokens for FTX users. “It is our overriding principle to protect the interests of all Tron token (TRX, BTT, JST, SUN, HT) holders,” Tron DAO said.

The move spurred many FTX users to convert their assets into Tron assets, with TRX trading at a 900% premium on FTX compared to other exchanges.

The following day, Sun tweeted “Further to my announcement to stand behind all Tron token… holders on FTX, we are putting together a solution together with FTX to initiate a pathway forward.”

Spurred by UST's Collapse Tron Overcollateralizes USDD

Justin Sun Isn't Taking Chances With a 201% Collateralization Ratio

The Defiant

He said that the ongoing liquidity crunch is harmful to the industry. “My team has been working around the clock to avert further deterioration. I have faith that the situation is manageable following the holistic approach together with our partners. Stay tuned.“

The cryptic tweets have attracted mixed reactions on social media, with some commenters praising Sun for stepping in to save the exchange. But others in the community believe Sun was vague on whether he was just reaffirming his commitment to bail out Tron token holders.

“Is this for all of FTX or just Tron holders?” asked Sterling Crispin, a software developer. He described Sun’s tweet as “ambiguous.”

“He’s only bailing out holders of his tokens that were on FTX,” said CryptoCondom, an influencer. “That makes up *maybe* .001% of the lost funds.”

Risk Management

The FTX disaster began in earnest on Sunday when Binance pledged to sell its sizable FTT position. Changpeng Zhao, the billionaire CEO of Binance known as CZ, said offloading the position was a matter of risk management. The move came after CoinDesk reported that on June 30 a $6B stash of FTT comprised 40% of Alameda’s balance sheet, including more than $2B earmarked as collateral for some of its $7.4B in loans.

Yet Binance’s sale exacerbated fears that FTX may be using a home-grown token to plug holes in Alameda’s trading book. 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.”

In any event, with FTT’s circulating supply at $3.3B on June 30, it was clear that Alameda’s holdings were too large to liquidate on the open market, calling into question the firm’s ability to meet its debts. And the run on the bank commenced.

According to data from Dune Analytics, the exchange’s reserves dropped by more than $1B in seven days.

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. Data from Glassnode shows that Alameda has deposited $49B on FTX since Nov. 8.

The backlog of withdrawals became unmanageable for FTX on Nov. 8, with Bankman-Fried announcing that Binance had signed a Letter Of Intent to purchase the embattled exchange.

Deposits

But Binance backed out of the deal after finding a hole in FTX’s books reportedly worth as much as $8B, igniting fears of a potential FTX bankruptcy.

“If CZ, the richest person in crypto, can’t do the deal, no one can do the deal.” said Arthur Hayes, the co-founder of BitMEX, a crypto derivatives exchange.

Bankman-Fried reportedly told employees that he believed Binance “never really plan[ned] to go through with the deal.” Blockworks reported that Binance would not agree to acquire FTX if its U.S.-based subsidiary, FTX.US, was included in the deal, citing an anonymous source.

Meanwhile, the bad news continues to pile up. On Nov. 9, Semafor reported that most of FTX’s legal and compliance staff had quit the previous day.

FTX was also criticized for continuing to accept deposits amid its liquidity woes. Earlier today, FTX published a notice on its website reading “we strongly advise against depositing.” Alameda Research’s website went offline on Wednesday.

Gallows humor abounded on social media. “We definitely need an oracle market for who’s gonna (fake) bailout FTX next,” said Twitter user, Cryptauk.

Updated on Nov. 10 to report market rally and add information on Sequoia’s writedown of its FTX investment.