Sam Bankman-Fried shocked the cryptocurrency world on Tuesday after the 30-year-old billionaire announced that his exchange FTX had entered into a transaction to be acquired by rival Binance.
It is a stunning turn of events for Bankman-Fried and his exchange, with both viewed over the years as stalwarts of the crypto market, enduring the highs and lows of extreme volatility while other players went under.
“Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc.),” Bankman-Fried tweeted Tuesday.
Here’s a rundown of the events leading up to FTX asking Binance to come to its rescue as rumors of insolvency and widespread contagion swirled — less than one year since FTX enjoyed a $32 billion valuation.
Balance sheets and billionaires
Bankman-Fried’s empire is diverges in two branches: FTX, a cryptocurrency exchange, and Alameda Research, a crypto trading firm.
Fears of contagion — like that sparked by Three Arrows Capital’s implosion from its exposure to failed stablecoin Terra — began circulating last week, driven by reports of heavy exposure to FTX’s native token on Alameda’s balance sheet.
A November 2 CoinDesk report broke down some eccentricities, specifically that about $3.66 billion of firm’s $14.6 billion worth of assets are comprised of so-called “unlocked” FTT token, with another $2.16 billion marked as “FTT collateral.”
“While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto,” CoinDesk writes.
The report drove concerns about FTX’s liquidity position, further compounded after some users reported difficulties in withdrawing cash funds from the exchange. Bankman-Fried took to Twitter on Monday to say that no one should be concerned about withdrawals being halted, which had happened with smaller exchanges as the crypto bear market deepened earlier this year.
Alameda Research did not immediately respond to Insider’s request for comment.
Also driving concerns of a wider spread contagion was an announcement over the weekend from Changpeng “CZ” Zhao, the CEO of Binance, who announced a roughly $530 million sale of FTX’s token.
“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” CZ tweeted Sunday, adding in a separate tweet that the liquidation is “post-exit risk management, learning from LUNA.”
Zhao’s net worth is roughly $18.3 billion, slightly above Bankman-Fried’s $15.6 billion, according to the Bloomberg Billionaires Index. The pair have publicly feuded on Twitter in recent months on topics from frontrunning trades to industry lobbying.
Following the news of Binance’s acquisition, FTT rallied 20% to about $17.50 after plunging more than 32% beforehand.
The price of other cryptocurrencies including Solana’s SOL, bitcoin, and ether dropped Tuesday as well, as worries seeped across the broader crypto market. But some experts say that CZ’s move to rescue FTX likely prevented a lot of pain.
“Binance’s acquisition of FTX probably stopped a lot of market contagion from happening, and this is a good thing,” Brent Xu, chief executive and cofounder of Umee, a decentralized finance firm, told Insider.
Xu maintained that a lack of transparency damaged FTX’s standing across the sector. “People just didn’t know what assets FTX had on their books, and so the result was an effective bank run that really shook the industry,” he said.
In response to a request for comment on the situation, a representative from FTX directed Insider to Bankman-Fried’s series of tweets late Tuesday morning.
“Our teams are working on clearing out the withdrawal backlog as is,” Bankman-Fried wrote on Twitter. “This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. — we apologize for that.”
Big VC bet turned sour
It’s worth noting, too, that Binance’s purchase of FTX holds widespread implications for the venture capital investors who pumped billions into the exchange when crypto was booming.
Sequoia Capital had invested in FTX last October when it was given a $25 billion valuation, and the company was then valued at $32 billion after raising $400 million just month later in January.
“I would be very surprised if Binance was paying anywhere near the book-value of the underlying assets of FTX,” Anthony Georgiades, cofounder of blockchain company Pastel Network, told Insider. “Binance is likely coming in and saying they will cover the liabilities for FTX, and then effectively have FTX hand over the rest of their assets.”
In Georgiades’ view, it’s unlikely Binance will come in and make investors like Sequoia whole again, because the primary goal will be to meet short-term claims such as customer withdrawals.