Why Bitcoin and Ethereum Prices Plunge After Binance Announces It Would Buy FTX| NextAdvisor with TIME

The crypto market is having a bad, very bad week.

This week’s crash brings a sudden reversal after weeks of relative stability for bitcoin and ethereum prices. Both tokens are now down more than 20% in the past week, fueled by fresh investor skepticism and ill-feeling on the heels of Binance’s announcement that it would buy out rival FTX, after concerns over FTX’s liquidity were raised. (Spoiler alert: Binance decided not to buy FTX after all.)

In light of all the news, bitcoin’s price continued to plummet, falling below $16,000 for the first time in two years late Wednesday afternoon. Ethereum sees a similar decline, falling below $1,200 for the first time since the crypto crash over the summer. The token continues to rally, coming perilously close to falling below $1,100, as of Wednesday afternoon.

While bitcoin and ethereum prices have remained low compared to last year, both tokens had been relatively stable, even in the face of Fed rate hikes, falling foreign currencies, the continuing war in Ukraine and stock market crashes.

“For a long time, bitcoin has aligned with broader risk appetite in the markets, but it goes without saying that Tuesday was not one of those days,” said Craig Erlam, senior market analyst at Oanda. “Cryptocurrencies have been hammered at the start of the week with bitcoin down nearly 20% in two days at one point due to concerns over FTX and the implications for the FTT token.”

So why is crypto tanking after almost a month of stability? Let’s dig in.

Why is crypto crashing?

The crash is likely due to the unfolding drama happening on FTX, a popular crypto exchange. As a result of a significant liquidity crisis at FTX, Binance CEO Changpeng Zhao announced that Binance would acquire FTX. Binance is the world’s largest centralized crypto exchange, and FTX was one of its biggest competitors. However, shortly after the introduction of the agreement, Binance announced late Wednesday afternoon that it would scrap its plans and not buy FTX, sending further shock waves through the market.

“As a result of corporate due diligence, as well as recent news reports of mishandled customer funds and alleged US agency investigations, we have decided not to pursue the potential acquisition of FTX.com,” Binance said on Twitter.

Many investors have been disheartened by the news of FTX’s collapse. The popular exchange’s founder, Sam Bankman-Fried, previously hailed as a “white knight” by the crypto industry, has now lost more than 94% of his fortune in a single day, according to Bloomberg.

“Today is a bad day in crypto,” says Edward Moya, senior market analyst at Oanda. “Binance had to step in to save Sam Bankman-Fried’s FTX crypto exchange. [He] has been the white knight during this crypto winter and a liquidity crisis from him has sparked a wave of unrest over the crypto transition.”

Terms of the deal have not yet been announced, but investors are already skeptical about the kind of attention this will draw from regulators. The SEC is reportedly expanding its investigation into FTX with a focus on potential violations of securities laws, according to the Wall Street Journal.

Moreover, the rapid crash of one of the world’s largest and fastest growing crypto exchanges in a matter of days (when no red flags were present) adds further skepticism to an already battered market during a year of economic turmoil.

What does this mean for crypto investors?

The collapse of FTX highlights the risks of investing in the crypto market. One day you’re on a cruise, the next you’re running to withdraw your money in a classic bank run. Crypto is not insured by the federal government through FDIC insurance, and like many exchanges, FTX’s insurance policies only cover some crime incidents, including theft and fraud. That means there is no insurance coverage just because the exchange goes under.

If you are not an FTX customer but hold crypto elsewhere, experts advise you to hold on tight. If you have invested in crypto for the long term using a buy-and-hold strategy, price fluctuations are to be expected and large drops are nothing to worry about. Now is a good time to read up on your exchange’s or wallet’s insurance policy, and based on what you find, consider moving your crypto to a personal wallet. There is one operator that includes offers directly to the consumer: Breakage insurance. Breach’s “Crypto Shield” is the first regulated insurance product for crypto investors.

Experts recommend keeping your cryptocurrency investments below 5% of your portfolio and investing only what you are willing to lose, as long as your crypto investments don’t get in the way of your other financial goals. Always prioritize saving for an emergency, paying off high-interest debt, and contributing to a traditional retirement plan before ever investing in crypto. If you’re in a good place financially and ready to enter the market, experts say now could be a good time to buy bitcoin or ethereum while prices are low, considering prices could fall more.