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New York
CNN Business
—
It was a striking, damn-high-at-work day in the crypto world, which even on its best day is a volatile and strange place.
Here is the deal: Cryptos were down all morning amid concerns about the solvency of FTX, the exchange platform founded by Sam Bankman-Fried, aka SBF. He is an entrepreneur whose name often appears along with descriptions such as “wunderkind”, “savior”, white knight, “digital Warren Buffett”, etc. He is, in short, a crypto celebrity (and a 30-year-old billionaire).
SBF had dismissed rumors of FTX’s liquidity problems, although its larger rival, Binance, said it would liquidate the $580 billion it held in FTX’s internal token.
Then, in a truly unexpected twist, Binance said it had offered to buy FTX to solve the liquidity crisis.
“This afternoon, FTX asked for our help,” Zhao “CZ” Changpeng, CEO of Binance, tweeted on Tuesday, citing a “significant liquidity crisis.”
Virtually no one saw the bombshell coming, given the public spat and apparent bad blood between Bankman-Fried and Zhao.
“I’m actually shocked by this,” one industry executive told me. “FTX failing … would be a bit like a Lehman Brothers event for space. But if they’ve been bailed out successfully, it would probably hinder things at the pass.”
While the deal is still in flux, a link between FTX and Binance, the two largest crypto exchanges by volume, would mark a tectonic power shift in the industry.
The news led to a brief bounce in digital assets, but was not enough to calm anxious investors.
Bitcoin fell more than 10% on Tuesday to hit a 52-week low around $17,600, according to CoinDesk. FTX’s internal coin FTT cratered to $5.24, losing 75% of its value. Other digital assets and stocks linked to the industry, such as Coinbase, also fell.
SBF is one of the most influential figures in crypto. During the summer, when digital assets fell in the so-called “crypto winter,” Bankman-Fried raised about $1 billion to bail out firms and acquire assets to try to keep the entire industry from collapsing. He also became the unofficial ambassador, bringing the promise of crypto to a skeptical mainstream financial world.
On Tuesday, however, the savior had to be rescued.
Fears for FTX and Alameda Research, Bankman-Fried’s trading house, began last week after a report published by news site CoinDesk suggested that much of Alameda’s balance sheet was made up of FTT, which is a relatively illiquid token.
Those fears were fueled by none other than Zhao, the head of Binance, who said his company would sell all of its holdings — about $580 million — in FTT, “due to recent revelations.” His announcement spooked investors and sent FTT plummeting.
Essentially, Bankman-Fried received a capital requirement of $580 million, and did not have the liquidity to meet it.
What happens now?
There is still a lot to figure out, but we can expect digital assets to remain volatile until more details about the FTX-Binance deal are made public. Some analysts say the tie-up could accelerate the push against crypto regulation from Washington.
Crypto may have just avoided its Lehman moment, but we’re in uncharted territory now, and it’s not clear who, if anyone, would be willing to take on the next bailout if Binance runs into trouble.
Alas, I’m not going to quit my day job after all. That privilege goes to one lucky ticket holder in California, the sole winner of the record $2.04 billion Powerball jackpot.
The ticket was sold at a Joe’s Service Center in California, the state lottery said on Twitter. The winner has yet to be announced, a representative told CNN, adding: “Someone is holding a very important piece of paper this morning.”
Much of the world is, rightly, concerned with the middle ground. But Wall Street is already looking ahead to Thursday, when the all-important Consumer Price Index report will give us an updated reading on inflation.
“Obviously, this midterm election — because democracy is on the ballot — is a big deal in the eyes of the public,” Peter Tuchman, a New York Stock Exchange veteran, told my colleague Matt Egan. “But how much it weighs on the economy is a good question.”
In short, only a major disruption can affect the market reaction at this point. Stocks have risen in recent days, in part because investors are betting that Republicans will take control of at least one chamber, leading to divided government.
Division means gridlock. And Wall Street love gridlock.
In this case, gridlock would mean Republicans can’t pass unfunded tax cuts and Democrats can’t push through unfunded spending programs — both of which would exacerbate inflation already at decade-high levels, and raise interest rates, Matt explains.
“Less government, complete gridlock, is likely to benefit the stock market,” Tuchman said.
Several traders told Matt that the midterm elections could easily be overshadowed by Thursday’s CPI, arguably the most important economic metric of the month.
“Markets can adjust to virtually anything except unknowns,” Tuchman said. “The biggest long-term unknown in the market is the inflation story.”
