FTX’s reserves are under siege as a wave of users withdraw their assets from the derivatives exchange after its dependency on its token FTT and its relationship with a sister company, Alameda Research, raised doubts about its financial strength.
On Nov, 8, Nansen reported that FTX users had withdrawn $1.2B worth of Ether and ERC-20 tokens from the exchange over the last 24 hours, and deposited just $540M during the same period.
FTX’s Bitcoin reserves dropped to zero at one stage, according to data from CryptoQuant. And FTT, the exchange’s native token, has plunged more than 22% in the last 24 hours. That’s an alarming development because last week CoinDesk reported that FTT accounted for 40% of Alameda Research’s balance sheet. Alameda is a proprietary trading firm that is interdependent with FTX.
Yet the withdrawals are the biggest worry because they may undermine FTX’s liquidity. Bobby Ong. co-founder of crypto data aggregator, CoinGecko, told The Defiant that withdrawals on Nov. 7 drove the largest daily outflow from FTX on record. “This may materially affect FTX’s volumes and market share moving forward,” Ong said.
Crisis of Confidence
The sudden moves show that FTX, a powerhouse in the crypto markets with $13B in daily trading volume, is suffering a crisis of confidence. As the failure of centralized crypto lender Celsius and the Terra blockchain ecosystem demonstrated earlier this year, it only takes a shift in sentiment to trigger a run on the assets of the biggest players in crypto. The close links between FTX and Alameda Research have long spurred concerns that the two firms were not being fully transparent about their off-chain holdings.
Meanwhile, analysts say Alameda and FTX are selling off other assets to shore up FTT’s price. On Monday, Binance, an FTX rival, delivered a blow by announcing it was planning to dump FTT tokens on the market, according to CEO Changpeng Zhou, also known as CZ.
Contagion is already spreading. Bitcoin is down 5% in the last 24 hours, and Ether has skidded almost 6%, according to The Defiant Terminal. And Solana has lost 12%. FTX is a major investor and supporter of the Layer 1 blockchain network.
Sam Bankman-Fried, the billionaire founder of FTX and Alameda, has not addressed the crisis since Monday. “A competitor is trying to go after us with false rumors,” he tweeted. “FTX is fine. Assets are fine.”
Some crypto investors expressed confidence that FTX was fundamentally sound. “I personally speculate that despite operational discomfort Alameda will be able to weather this storm, either by mobilizing existing cash reserves or by SBF bringing onboard new capital to bail out if necessary,” Daniel Bar, the founder of Bitfwd Capital, told The Defiant.
The problems for FTX and Alameda began on Nov. 2 when CoinDesk reported that a “private financial document” detailing Alameda’s balance sheet on June 30 showed almost $6B of its $14.6B balance sheet was FTT tokens.
That included $2B earmarked as collateral for some of its $7B in debt. With FTT’s circulating supply sitting at more than $3B at that time, the exchange’s FTT holdings were greater than the open market could absorb, calling into question FTX’s ability to service its debts.
FTX and Alameda said the document provides an outdated picture of its finances. Alameda Research CEO Caroline Ellison tweeted that the firm holds more than $10B worth of assets that are not reflected in the document and has paid down most of its loans since.
But on Nov. 6, Binance, FTX’s top rival and a former investor in the exchange, turned up the pressure by announcing it would offload its sizable FTT stake. “CZ’s announcement that Binance will exit its FTT position caused FTT to initially fall by 11.5% to $21.96,” Ong said.
Binance said it would try to minimize the market impact of its trade, and Ellison offered to direct Alameda to purchase the FTT tokens for $22 each. Binance has not explicitly stated if it will take FTX up on the offer, but its CEO, Changpeng Zhou, suggested he would be open to the idea in exchange for $580M worth of BNB.
“Various crypto Twitter celebrities are calling on others to sell their FTT and the calls appear to be heeded as the token plunged through its $22 price barrier,” Mark Monfort, the co-founder of web3 venture studio, NotCentralised, told The Defiant.
Billionaires with Abbreviations
The standoff between the two crypto titans known simply by their initials has captured the attention of crypto.
“The billionaires with abbreviations for names are fighting and as a result we are losing money,” tweeted Cobie, a prominent crypto influencer.
Hasu, the strategy lead for Flashbots, chimed in:.“Toxic rivalry often degrades industry structure, leading to a worse outcome for everyone.”
The drama prompted many users to withdraw their assets from FTX as a precaution against its possible insolvency, with the value of FTX’s reserves falling by $955M in one week, according to Dune Analytics.
On Nov. 8, Statelayer of SudoSwaps spotted that only transactions sized below five-figures were among the withdrawals recently processed by FTX.
Julien Bouteloup of Curve Finance tweeted that his team removed more than $100M from FTX and Binance. “Fasten your seatbelt, lift-off is imminent,” he said.
Michael McQuaid, growth manager at Bloq, a web3 infrastructure firm, spotted that stablecoin yields on the FTX US platform spiked as high as 84% amid the liquidity crunch. “Guessing most of those longs aren’t aware the rate is so high and will close their positions once they do.”
Meanwhile, the symbiosis between FTX and Alameda Research has been thrust into the spotlight. It appears Alameda Research has been helping to keep assets flow through the exchange amid the surging demand for withdrawals.
On Nov. 7, Larry Cermak, a cryptocurrency journalist, shared a spreadsheet tracking the balances of wallets suspected to be controlled by Alameda Research on social media. The data showed that the wallets’ balances fell by 47% to $230M over the past month, including $104M that was sent to FTX.
The data also suggests that Alameda also moved $121M to Genesis, an institutional crypto trading and yield platform.
Cermak concluded that Alameda was offloading its SOL holdings to defend FTT’s support level at $22. However, he also cautioned that on-chain data does not provide a complete picture of Alameda’s finances. “There are a lot of off-chain holdings and it’s also theoretically possible Alameda is just creating new wallets so it’s not as easy to track by idiots like me,” Cermak said.
On Nov. 7, FTX withdrew $3M worth of ETH from Gearbox Protocol, despite being stung with a withdrawal fee of 20 ETH that it could have avoided by waiting for another week.
“It’s absolutely absurd that no on-chain sleuths can uncover the FTX cold wallet(s), and FTX themselves will not release any info on them,” tweeted crypto investor and influencer, DCinvestor. “Alameda topping FTX off… never mind that Alameda is also simultaneously turning over every couch cushion for loose change on-chain in the process. It’s hard to imagine how they could make this look any worse than it does at the moment.”
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On Nov. 8, Ben Zhou, the co-founder of the leveraged exchange, Bybit, tweeted that Alameda had breached the terms of sale when buying its BIT tokens, and had dumped a sizable share of its tokens on the markets. The BitDAO community demanded a response within 24 hours, and holds around $600,000 worth of FTT.
Zhou said FTX had agreed not to sell any of its 100M tokens within three years of purchasing them. Wu Blockchain, a crypto reporter, tweeted that FTX currently holds 97M BIT tokens in its hot wallet, less than it had pledged not to sell.
Ellison replied “busy at the moment but that wasn’t us, will get you proof of funds when things calm down.” Zhou thanked Caroline for the swift response. “I am sure Alameda will be able to navigate the current straits,” he said.