FTT, the native token of FTX, lost most of its value after rival Binance, the world’s largest cryptocurrency company, announced plans to acquire the company.
The coin was worth about $22 on Monday and fell below $5 on Tuesday afternoon in New York. The sale wiped out more than $2 billion in value in 24 hours.
Binance CEO Changpeng Zhao, known as CZ, tweeted to his more than 7 million followers that he expects FTT to be “very volatile in the coming days as things develop.”
The cryptocurrency category fell on Tuesday, with Bitcoin and Ethereum both down more than 10%. Crypto exchange shares Coinbase also experienced a double-digit percentage drop Robin Hoodwhich traders use to buy and sell crypto, fell by about 19 percent.
“It’s probably the most dramatic deal I’ve ever seen in the history of the crypto industry,” said Nic Carter, a partner at blockchain investment firm Castle Island Ventures. “It basically merges the two biggest offshore exchanges into one entity, an absolute coup for CZ and Binance – and a real disaster for FTX.”
The deal between the two companies is non-binding and follows what FTX CEO Sam Bankman-Fried called a “liquidity crisis” at his company, which was valued at $32 billion in a funding round earlier this year.
The acquisition affects only FTX’s non-US operations. The US division will remain independent from Binance. However, according to the 2021 audit, FTX’s US share was only 5% of total revenue. FTX is located in the Bahamas, where Bankman-Fried lives.
Like many crypto companies, FTX created its own token called FTT, which could be bought like bitcoins, although it was not as widely available. FTT owners were promised lower transaction costs and the opportunity to earn interest and rewards such as waived blockchain fees. While investors can benefit from FTT and other coins rising in value, they are largely unregulated and particularly vulnerable to market downturns.
In 2019, Binance announced a strategic investment in FTX, saying that as part of the deal it had taken a “long-term position in FTX Token (FTT) to help enable the sustainable growth of the FTX ecosystem.”
Due to Binance’s central position in the crypto industry and its large holdings in FTT, the company had a particular impact on FTX and the market’s perception of the company. Investor confidence in FTX was shaken over the weekend when Zhao tweeted that Binance is selling its holdings from the Financial Transaction Tax.
Zhao said Binance had about $2.1 billion worth of FTT and BUSD, its own stablecoin.
“Due to the recent revelations that have come to light, we have decided to decommission all remaining FTTs from our books,” he said.
FTT, which peaked at around $78 in September 2021, was close to $25 a day before Zhao’s tweets. It fell below $16 on Monday and then fell off a cliff after the deal was announced on Tuesday. According to CoinMarketCap, FTT’s circulating supply is worth about $735 million, up from $2.9 billion on Monday.
Bankman-Fried said that in the 72 hours leading up to Tuesday morning, about $6 billion had been withdrawn from FTX, according to Reuters. On an average day, the net income is tens of millions of dollars.
“The fact that Sam was willing to make this trade suggests that FTX was deeply weakened in the bank that started in the last 48 hours,” Carter said. “We don’t know exactly what the problem was, whether they were borrowing or gambling users’ deposits.”
FTX did not respond to multiple requests for comment from CNBC.
Earlier on Tuesday, FTX had halted withdrawals from its platform as spooked investors tried to withdraw their funds – a move reminiscent of the collapse of other crypto firms this year, including Celsius, Voyager Digital and Three Arrows Capital.
The news about FTT raised concerns about Alameda Research, a trading firm of Bankman-Fried and a sister company of FTX. Last week, a report on Alameda’s financial situation showed that a large part of its balance sheet is focused on the financial transaction tax and its various operations used the token as collateral. Alameda has denied the claim, saying the financial transaction tax is only part of its balance sheet.
“If the price of FTT goes down a lot, Alameda could face margin calls and all kinds of pressure,” said Jeff Dorman, chief investment officer at digital assets firm Arca. “If FTX is Alameda’s lender, everybody’s in trouble.”
– CNBC’s Kate Rooney and Tanaya Macheel attended to this report.
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