Binance to acquire controlling stake in FTX
A fall from grace for Sam Bankman-Fried and FTX. But what happened?
This morning while walking to class, I was listening to Sunday's "Thinking Crypto Podcast" episode. Host Tony Edward discussed the significance of the ongoing public feud between Binance founder Changpeng Zhao (CZ) and FTX founder Sam Bankman-Fried. About 2 hours later, I opened my phone, and to my shock, I found out that Binance had signed a non-binding letter of intent to acquire a controlling stake in FTX.
Here is what happened.
A short history of FTX
FTX has had one of the crypto industry's fastest and most successful rises. Founded in 2019 by Sam Bankman-Fried, the exchange quickly rose to become a key competitor in the industry. After two funding rounds, FTX had a $32 billion valuation with investors, including BlackRock, Ontario Teachers' Pension Plan, Softbank and Sequoia Capital.
Throughout the following two years, FTX went on an expansion spree. Here are some examples of their purchases.
August 2020: Acquired crypto portfolio tracking app Blockfolio for $150 million
April 2021: Bought the naming rights to the Miami Heat's basketball stadium for $135 million
June 2021: Announce $210 million naming rights deal with TSM, an esports organization
June 2021: Announced partnership with the MLB for logos to be featured on umpire uniforms
Late 2021: Signed partnership with Mercedes-AMG F1 team, adding logos to both cars and uniforms of drivers Lewis Hamilton and George Russell
Other brand ambassadors signed: Steph Curry, Tom Brady, Kevin O'Leary
January 2022: Launched a $2 billion venture fund, FTX Ventures
September 2022: Bought out bankrupt crypto brokerage Voyager's digital assets for $1.42 billion
Events leading up to the deal
October 30th:
Coin desk reported that a leaked balance sheet showed that FTX’s sister company, Alameda Research, was on shaky grounds. A large portion of Alameda’s resources were in FTT which sparked fear that a slight decline in FTT’s price could cause a crisis for Alameda and FTX.
November 6th:
CZ tweeted news that Binance would be liquidating their $2.1 billion USD equivalent of BUSD and FTT (FTT is the native token to the FTX exchange.
The original thread of the decision did not seem to be ill-intended or to signify any bad blood between the two crypto exchanges. However, shortly after, CZ tweeted the following.
November 7th:
Binances announcement in addition to Alameda’s shaky balance sheet and heavy concentration in FTT, sent investors running to take their crypto off of FTX and sell their FTT tokens. This caused FTT to tank as the FTX exchange experienced roughly $6 billion worth of withdrawals, compared to an average inflow/outflow volume of tens of millions.
November 8th:
Just before noon, CZ tweeted that FTX had come to Binance to ask for help with an ongoing liquidity crunch. The two agreed that Binance would entirely acquire FTX.com (excluding FTX US).
Soon after, CZ sent out a tweet criticizing crypto exchanges' use of fractional banking. Stating that "banks run on fractional reserves, crypto exchanges should not." Crypto exchanges' use of fractional banking significantly contributed to the Voyager bankruptcy and LUNA collapse. The FTX exchange also uses fractional banking, which most likely contributed to the 'liquidity crunch' leading to this deal.
Market reaction
Markets were not happy with this news. Following the announcement, FTT, the native FTX token, dropped 78% as worries of another LUNA-type incident grew. Aside from FTT alone, the rest of the market was also affected. Bitcoin and Ethereum both took significant hits following the news, decreasing by 10% and 15%. Some are speculating that this news might be the event to push the market past its previous line of support.
Details of the deal
Binance will acquire FTX in full
The deal rests on non-binding LOI and is pending due diligence
There is no current value to the deal however FTX was once worth $32 billion
Acquisition will exclude FTX U.S
FTX U.S only makes up 5% of total revenue
Why is this important
Binance is the world’s largest cryptocurrency exchange by trading volume. FTX is the third largest. A deal like this is comparable to if Apple purchased Samsung. If the deal goes through, it would be one of the most significant acquisitions in the cryptocurrency space and give Binance a more substantial foothold in the derivatives market.
Additionally, an event like this creates fear within the markets. Investors still have PTSD from the events of Voyager and Tera LUNA. It also begs the question: is the FTX liquidity crisis a sole issue, or does it point to increasing financial fragility amongst of other key market players?
In response to these fears, CZ tweeted out that Binance will start showing proof-of-reserves. Full transparency by showing proof-of-reserves should restore some faith in investors, as a lack of transparency has been a critical issue in the space.
Conclusion
This is a crazy deal. My jaw literally dropped when I read the headline. Over the next few months, we will see if due diligence passes and the deal goes through. If it does not, I’m not too sure what lies ahead for Sam Bankman-Fried and FTX.