Cryptocurrencies saw a second day of steep declines on Wednesday as investors continued to worry about the stability of the sector and the financial health of major exchange FTX despite plans for a bailout deal from the biggest. Binance rival.
Crypto giant Binance on Tuesday signed a non-binding agreement to buy FTX’s non-US unit to help cover a “cash shortage” on the rival exchange.
The proposed deal between high-profile rivals follows week-long speculation over FTX’s financial health that snowballed into $6 billion in withdrawals in the 72 hours before Tuesday’s deal, raising questions about the creditworthiness of one of the largest cryptocurrency exchanges in the world.
FTX and Binance did not disclose the terms of their deal, and markets faced further uncertainty over its continuation.
Bitcoin, the largest cryptocurrency by market value, fell 5.5% on the day to $17,656, following a 10% drop on Tuesday that marked its worst day since mid-August. Ether, the second largest, extended its losses on Wednesday to hit its lowest level since July.
FTT, the smallest token linked to FTX, was down another 16%, after plunging 72% on Tuesday. Its market capitalization fell below $600 million, from around $3 billion earlier this week, according to data from CoinGecko.
“And if the deal doesn’t go through, or [Binance CEO Changpeng Zhao] come back and say I’ll give 10 cents on the dollar? This is the blind spot the market is not ready for,” said Scottie Siu, chief investment officer at Axion Global Asset Management in Hong Kong.
Zhao tweeted a letter to staff stating that there was no “blueprint” behind the deal and that “FTX’s decline is not good for anyone in the industry” and not a win.
“Regulators will scrutinize exchanges even further,” he said in the letter, previously reported by the Financial Times. “Worldwide licenses will be more difficult to obtain.”
Zhao also urged investors not to trade FTT tokens and ignore prices.
The turmoil at FTX is the latest sign of trouble in the rapidly changing world of cryptocurrencies. Crypto prices have fallen so far this year as interest rate increases and a broader financial market downturn have prompted investors to shed riskier assets. After rapid growth in 2020 and 2021, Bitcoin is down around 62% this year.
Binance coin, the token used on Binance, was also not spared. The world’s fourth-largest cryptocurrency, with a market value close to $50 billion, was at $299, down 8.8% on the day.
“It’s been a really devastating year for the industry,” said lead researcher Ryan Wong of Huobi, a crypto trading exchange, who said the unrest in the industry would “lead to massive public distrust. towards centralized establishments, which, in turn, lead to an even stricter regulatory impact.
“We expect more headwinds as events unfold, due to FTX’s involvement with many institutions.”
Some analysts have drawn a parallel with the collapse of stablecoin TerraUSD and its related token Luna earlier this year, which triggered a string of other bankruptcies by Singaporean fund Three Arrows Capital and US fintech firms Voyager Digital and Celsius.
FTX allows users to buy and trade cryptocurrencies, which can be held on the platform.
Its CEO, Sam Bankman-Fried, said his teams were working to clear the backlog of withdrawals, although uncertainty in the market over the status of the bailout and the depth of the problems had traders nervous.
“Crypto players react more quickly to news and rumors, which, in turn, creates a liquidity crisis much faster than what we would have seen in traditional finance,” said Fabian Astic, head of of DeFi and digital assets at Moody’s Investors Service.
He attributed this to “limited transparency and uneven regulation in crypto-finance”.
It is unclear how regulators will view a deal between the two crypto exchanges. U.S. antitrust authorities may insist on reviewing the merger, antitrust experts said.
Binance and FTX’s U.S. operations are not part of the deal, said Bankman-Fried, who is originally from California but lives in the Bahamas, where FTX is based.
Binance is also under investigation by the US Department of Justice for possible violations of money laundering rules, Reuters reported last week. It was part of a series of investigations this year into Binance’s troubled history with financial regulatory compliance.
Singaporean public investor Temasek Holdings, a shareholder of FTX, said in comments emailed to Reuters, “We are aware of the developments between FTX and Binance, and engage FTX as a shareholder.”