The world of digital currency is always not peaceful, and now the fire has burned to the "currency central mother" Sam Bankman-Fried (SBF). The grudges between him and "China's richest man" Zhao Changpeng are related to the life and death of FTX.
On November 2, a report on Alameda Research was leaked, implying that Alamada would fall into a bankruptcy crisis and FTT would fall into a liquidity crisis. SBF could not sit still and came out to clarify in a high-profile manner that everything was normal. However, Binance founder and CEO Changpeng Zhao (CZ) immediately issued a statement saying that he was worried about the recurrence of Luna’s “death spiral” and would sell off all FTT on the book.
At this time, Alameda jumped out and said that as long as Binance sells, they will buy it at the market price of $22 per coin that day. The war of words on Twitter is about to break out, and the war between Binance and FTX has entered a fever pitch.
The market is beginning to think. There are currently about 60 million FTTs circulating in the market. If Binance throws more than 23 million FTTs directly to the market at this time, how will Alameda respond? Will FTT’s market value return to zero? As of November 8, FTT has fallen from the previous $25.9 to $17.97, a drop of more than 30%.
The beginning and end of the story
On November 2, the cryptocurrency news website CoinDesk disclosed the business relationship between the hedge fund Alameda Research and the FTX cryptocurrency trading platform successively founded by Sam Bankman-Fried (SBF). The market’s concerns about Alameda’s operating conditions and the liquidity of the FTX platform’s digital token FTT emerged vividly, adding fuel to the already uneven currency circle.
Coindesk's report stated that in Alameda's balance sheet, FTT is its largest single asset, holding approximately 140 million coins. FTT-related assets are US$5.8 billion, accounting for 88% of its net assets. At the same time, 140 million coins account for 70% of FTT's 200 million coins in circulation. The news instantly detonated the currency circle.
He Yi, the co-founder of Binance, the world's largest cryptocurrency exchange, which has had many "love-hate disputes" with FTX, insinuated FTX's operations on November 5, saying:
Binance does not give unsecured loans, does not participate in transactions, does not blindly buy companies, and does not spend blindly on sponsorships. 20% of FTX's equity has been sold.
On November 6, Alameda Research co-CEO Caroline Ellison finally responded on Twitter, stating that the balance sheet disclosed by CoinDesk was only a portion of the company’s assets, and that more than $10 billion in assets were not reflected, and said that most of the loans had been repaid. She said:
Given the tightening of the crypto credit space this year, we have now returned the majority of our loans and we obviously have portions that were not disclosed by Coindesk.
On November 6, Binance founder and CEO Changpeng Zhao (CZ) tweeted that he was worried that FTT would suffer an instant collapse like Luna, and would sell off all FTT on the books in the next few months. The 23 million FTT previously transferred to the Binance account was only part of what was obtained after withdrawing from FTX equity.
After hearing what CZ said, Alameda couldn't sit still and immediately expressed his willingness to spend 22 US dollars per coin to buy all the FTT that Binance wanted to sell. However, many people expressed doubts about whether FTX could really spend 580 million US dollars to repurchase the tokens. The war between FTX and Binance has entered a fever pitch.
Is Alameda on the brink of bankruptcy?
As the friction between the two sides intensifies and the war of words heats up, will Alameda go bankrupt? It has also become a hot topic in the market.
According to a CoinDesk report, as of June 30, Alameda Research had $14.6 billion on its balance sheet, of which FTT accounted for the largest share at $5.8 billion, accounting for 88% of its net assets. On the liability side, Alameda Research has $8 billion in liabilities, including $2.2 billion worth of loans guaranteed by FTT.
This, coupled with the company’s alleged exposure to illiquid altcoins, prompted some analysts to predict future bankruptcy.
Mike Burgersburg, an independent market analyst at Dirty Bubble Media Substack, said Alameda will never be able to repay its debt by cashing out the majority of its FTTs, stating:
There are few buyers, and the largest buyers appear to be the companies most closely associated with Alameda, whose market value will quickly approach $0 in the event of a massive sell-off of FTT.
Although Caroline Ellison responded that more than 10 billion US dollars in assets were not reflected and said that most of the loans had been repaid, some analysts pointed out that Ellison’s simple reply did not respond to related transactions and capital transactions with FTX, which was difficult to dispel external doubts.
However, as the encryption industry has developed to this day, some analysts have pointed out that both Binance and FTX have developed into a situation of "too big to fail". The analysis said:
CZ and SBF have also become very important leaders in the encryption industry. But no matter how we quarrel, there are only eternal interests. We believe that the encryption industry will continue to move forward driven by the common interests of all parties.
Will FTT fall into a death spiral like Luna?
With the revelation of the balance sheet on November 3, FTT has plummeted by more than 30%, and concerns that it may fall into a "death spiral" like Luna are gradually spreading.
Terra (Token Luna) is a public chain ecosystem built around stablecoins. Luna's goals include two points: on the one hand, promoting the prosperity of the Terra public chain, and on the other hand, promoting the large-scale adoption of its stablecoins represented by UST.
Therefore, Luna is essentially an invisible collateral for stable coins such as UST. Terra stipulates in the system that UST is minted by destroying Luna. When UST is higher than 1 US dollar, Luna will be destroyed to create UST, thereby accelerating the supply of UST to reduce the currency price. When UST is lower than 1 US dollar, UST will be destroyed to generate LUNA, which stabilizes the currency price by reducing the flow of UST.
On May 9th and 10th, UST experienced a serious de-anchoring incident due to capital hunting and debt crisis. Do Know, the founder of Terra, said that he had enough assets to absorb the decline in UST's exchange rate. However, the market soon discovered that UST's exchange rate continued to decline, falling as low as $0.6.
When UST's currency value fell and was sold off heavily, a large amount of Luna supply was created instantly. In the sluggish atmosphere of the currency market itself, a "death spiral" of LUNA/UST was created. It is known as the first large-scale "Thai Baht + Lehman" incident in the history of encryption development.
Therefore, some people believe that if CZ continues to liquidate more FTT tokens, it will force Alameda's FTT loans to be sold as collateral on a large scale, and the FTX trading platform will close FTT trading to avoid any losses that will occur in exchange for stablecoins and altcoins. If this happens, this will cause a sell-off of FTT in the entire crypto market, which will undoubtedly lead to a death spiral.
Additionally, a scan of the blockchain confirmed that FTT ownership is highly concentrated, with 10 addresses holding 93% of the tokens. According to blockchain analytics company Messari, only about 180-200 addresses are actively trading in FTT tokens. This further indicates that the number of individual FTT holders is very small, and the overall demand for the token is low.
FTT’s trading volume also further points to its lack of popularity. According to Messari data, in October, FTT's daily trading volume ranged from US$6 million to US$42 million, equivalent to 0.1% – 0.8% of Alameda's total holdings in FTT. The actual trading volume of LINK ranges from US$25 million to US$173 million, which is approximately four times that of FTT.
Clara Medalie, head of research at analytics firm Kaiko, said FTT is a relatively illiquid token on the open market, saying:
Overall, in my opinion, FTT is less liquid on the open market, so Binance’s plan to liquidate all of its holdings of FTT tokens is a fairly significant market event.
Media previously reported that FTX had admitted that it was an active buyer of FTT tokens and claimed that it spent 33% of the fees generated by the FTX market to purchase FTT every week.
According to CoinMarketCap, Solana, ChainLink, and BNB prices have all turned bearish due to the FTT sell-off.
Nonetheless, independent market analyst Satoshi Flipper believes FTT prices may rebound in the future, with the current decline signaling a retest of long-term support ranges.
How FTX quickly became an “Internet celebrity” in the currency circle
Media information shows that before founding the FTX exchange, SBF worked at Jane Street, a quantitative trading company on Wall Street.
In 2017, Bitcoin skyrocketed from US$2,500 to nearly US$20,000 in six months. The 25-year-old SBF sensed an opportunity and resolutely quit his high-paying job on Wall Street, founded Alameda Research, a crypto quantitative trading company, and began a life of profit-seeking in the cryptocurrency industry.
Regarding the reasons for entering the digital currency market, SBF is also blunt:
When I entered the cryptocurrency space, I had no idea what cryptocurrencies were. I just feel like there are a lot of good trading opportunities out there.
In an interview with the media, SBF said that its first pot of gold came from Bitcoin arbitrage in the US and Japanese markets. At its peak, it could earn as much as 25 million US dollars per day through arbitrage. After continuous accumulation of capital, SBF established FTX in May 2019.
Unlike Coinbase and other platforms for novices to buy and sell cryptocurrencies, FTX is known for providing complex derivatives. Under the digital currency trend, FTX has grown from a small cryptocurrency exchange to a leading company in the crypto industry in just a few years. Daily trading volume has climbed from $50 million in 2019 to $2 billion currently.
In addition to innovative products, low transaction fees, and a large number of currency options on its platform, gaining market share through acquisitions is also a strategy that FTX has been adopting. Previous analysis pointed out that SBF is taking advantage of the chaos in the cryptocurrency market to expand his empire, and has so far completed the acquisition of troubled Japanese exchanges Liquid, BlockFi, and Voyager Digital.
After gaining market share, FTX needs to further gain its compliance in the cryptocurrency market, and to do this it needs to expand its political influence step by step.
According to media reports, SBF spent nearly $40 million to support the Democratic Party in this midterm election and has become one of the largest donors to both parties.
Previously, according to data from Open Secrets, SBF contributed a total of $39.8 million in the 2021-2022 cycle, making it the sixth largest political contributor.
During the 2020 presidential election, SBF donated approximately $5.2 million to President Joe Biden's campaign.
SBF has said in interviews that he plans to spend up to $1 billion to help the 2024 presidential campaign.
Yang Mindao, founder of dForce, analyzed that although Binance has ten times the users and profits of FTX, FTX’s political influence in the United States is far more than ten times that of Binance. He said:
The difference between Binance and FTX in terms of strategic routes: Binance takes the Mainstreet route, where users are fully leveraged and do whatever is needed. FTX, on the other hand, is an elite route started by a group of professional traders, and in the later period, political leverage was added (K Street). SBF once satirized CZ on this, alluding to 'I can enter and exit Washington, D.C. at will, can CZ? '
The love-hate relationship between FTX and Binance
Some analysts believe that Binance can successfully use FTX's political influence and compliance in the U.S. cryptocurrency market to promote its development in the U.S. currency circle. A conflict will not be beneficial to either.
Last year, Binance announced its withdrawal from FTX. “After the divorce,” the relationship between the two parties began to take a turn for the worse.
On December 20, 2019, less than half a year after FTX was launched, Binance announced a strategic investment of US$1 billion in FTX. Binance stated that in addition to its equity investment in FTX, it will also hold FTT for the long term to help the sustainable development of the FTX ecosystem and keep it abreast of the development of the Binance ecosystem.
At that time, the derivatives market was firmly dominated by BitMex and OKEx, and Binance, which started with altcoins, had just launched its contract business. Binance hopes to expand its ecological layout by investing in FTX and help it catch up from behind in the derivatives market. The two parties also spent a harmonious honeymoon period at this time. FTX has also lived up to Binance’s expectations and shined in derivatives products and innovation.
One year after investing in Binance, SBF revealed that FTX’s latest valuation has reached US$3.5 billion. In just one and a half years, the valuation has increased from US$100 million to US$3.5 billion.
By July 2021, FTX completed a US$900 million Series B financing with US$18 billion. About two years after its establishment, FTX’s valuation increased from US$100 million to US$18 billion. CZ also stated at that time that Binance had completely withdrawn from FTX’s equity investment.
The exit was part of the normal investment cycle, was done under good conditions and we remain friends.
If Binance invests $18 billion to exit at a valuation of $1 billion, the return on Binance’s investment in FTX will be ten times. To a certain extent, it can be confirmed that Binance made approximately US$1.6 billion by investing in FTX.
Although there was no direct conflict between Binance and FTX around July 2021, the businesses of both parties have already highly overlapped and directly competed. After that, a period of friction entered.
Some analysts pointed out that the friction between Binance and FTX is caused by many factors. On the one hand, the two parties conflict in the market share of core businesses such as spot and derivatives. On the other hand, there is competition in the ecological layout. But the more important conflict comes from the competition between the two’s strategies and cultures. The analysis said:
The genes of being a Trader determine that SBF has a strong style of opening up situations through trading, and has a very high risk appetite. FTX is more like a large 3AC, running funds with high leverage all year round and making extremely risky strategic choices.
CZ, who is a Chinese engineer, understands human nature well and has a very high risk appetite, but Binance dares to compete and expand in non-compliant and casino ways instead of increasing leverage.
