Review of the 48-hour battle between Binance and FTX: What to watch next

The past 48 hours have been a wild and turbulent one.

If you want to know what’s going on in the crypto world right now, you’ve come to the right place. But if you’ve been following the drama closely, you probably already know the information in this article.

Let's look at the prelude first:

The second-largest cryptocurrency exchange, FTX, is experiencing a bank run. As rumors of a debt crisis emerged and its top competitor, Binance, released a shocking announcement, about $1 billion was lost from the FTX platform in the past few days alone. What exactly happened?

There are two main characters in this farce, and the others are almost all minor characters.

• Sam Bankman-Fried (SBF): FTX CEO and a “true altruist” who has spent much of the past few years nudging lobbyists and politicians in the United States.

• Changpeng Zhao (CZ): Founder and CEO of Binance, considered possibly the richest person in the cryptocurrency space.

SBF has been under fire for weeks after making some unflattering statements regarding cryptocurrency regulation, as well as public sentiment swinging around the CEO as he persisted in a debate with cryptocurrency advocate/entrepreneur Erik Voorhees.

At about the same time, the balance sheet of FTX's sister company Alameda Research was leaked. SBF is said to have about 90% proprietary trading, and the two companies work very closely together. We don't know the details of their arrangement, but it seems that there is some intentional mixing of funds, which is not a good thing for FTX. The balance sheet leak is even worse.

The biggest problem? More than $2 billion of borrowers’ collateral on Alameda was denominated in $FTT, a crypto token that FTX launched to raise funds for the exchange. FTX gave Alameda a large portion of the token, and the lender allowed Alameda to use it as collateral.

You can see more details about the balance sheet below:

According to CoinDesk data, Alameda Research has assets of $14.6 billion and liabilities of $8 billion.

Assets: $3.66 billion in FTT, $2.16 billion in “FTT collateral”, $3.37 billion in crypto ($292 million in SOL, $863 million in “locked SOL”), $134 million in equity securities, and $2 billion in equity securities.

Most of the net equity is pegged to fully liquid altcoins.

But Alameda and FTX more or less ignored the fact that the token had extremely low liquidity. So when Alameda and FTX experienced a liquidity crunch in the past few days, lenders came to collect and they couldn't sell the tokens to repay their debts. A lot of this depends on the price of the token.

At the same time, rumors began to circulate that the exchange was unable to repay its customers’ deposits.

That’s where CZ and Binance come in. Binance actually incubated FTX when it was still a rising star; they were one of the earliest investors. But after the balance sheet leak, Binance publicly announced its decision to exit its $2.1 billion holding of FTT.

Liquidating our FTT is just risk management after exiting, learning from LUNA. We have provided support before, but we will not continue to pretend to love each other after separation. We are not targeting anyone. But we will not support those who lobby against other industry players behind the scenes.

As CZ prepares to dump billions of dollars of FTT tokens on the market, things get even worse for Alameda and FTX. Rumors of a bank run intensify, bringing more troubles to the exchange. Now, they have to provide loans against the soon-to-be-bankrupt FTT while injecting stablecoins into the exchange to pay customers. There is plenty of evidence on-chain of this desperation, with Alameda exiting positions at huge losses, seemingly to cover customer deposit withdrawals.

Last night, FTX seemed to have stopped serving deposits to customers. The liquidity crisis turned into a blatant bankruptcy:

Then, this morning, there was chaos on social media and silence from the FTX team. Then, the big news came: Binance and CZ decided to acquire FTX.

If FTX's troubles worsen, the acquisition price could be as low as $1. SBF, a lavish political donor and one of the world's youngest billionaires, was on the cover of Fortune magazine a few weeks ago, and now, a few weeks later, his wealth has plummeted. This is definitely jaw-dropping news. FTX was once seen as an impregnable fortress and the new generation of elites in the crypto world. Fortunately, the deposits should be intact, so consumers will not be affected.

There are still many unanswered questions:

• Will the acquisition be successful?

• What will happen to FTT tokens?

• What will become of FTX?

• How should the government respond to industry consolidation?

• How will this massive upheaval affect the crypto market?

These are issues that require our attention in the next few days and are worthy of our attention.