“If the price of FTT goes way down, Alameda could face margin calls and all kinds of pressures; two, if FTX is a lender to Alameda, then everybody’s going to be in trouble,” Dorman said in a CNBC article.
Why Coinbase, MicroStrategy, and Riot Blockchain Shares Are Falling Today
What happened
The entire crypto industry, from cryptocurrencies to crypto stocks, was incredibly volatile this morning amid rumors that major crypto exchange FTX was facing insolvency. Then, after a run on the stock exchange, FTX entered into an agreement to sell its non-US operations to the crypto exchange Binance.
Share of the major crypto exchange Coin base (COIN) traded as much as 12% lower as of 10:38 a.m. ET today before recouping much of those losses. By noon ET, shares were only down about 1.8%.
The Bitcoin (BTC) miner and business intelligence company Micro strategy (MSTR) so too, shares are trading as much as 17% lower today before halving losses. Shares of the Bitcoin miner Riot Blockchain (RIOT) was down as much as 13%, but also reversed most of those losses.
Image source: Getty Images.
So what
The problem started when rumors on social media suggested that FTX has a large part of its balance tied up in its internal cryptocurrency FTX (FTT), which has raised liquidity concerns. These concerns have been bolstered by the fact that Alameda Research, a trading company linked to FTX, also had a ton of FTT on its balance sheet.
Jeff Dorman, chief investment officer at digital asset investment firm Arca, explained that many are concerned that Alameda is using these FTT tokens as collateral, which could lead to two problems.
The situation worsened after Binance CEO Changpeng Zhao announced that the company would liquidate its large $2 billion position in FTT, due to concerns about FTX’s balance sheet. The price of FTT has decreased by more than 21.6% in the last 24 hours.
FTX founder and CEO Sam Bankman-Fried took to Twitter to say that “a competitor is trying to go after us with false rumors.” He added that “FTX has enough to cover all client holdings. We do not invest client funds (even in treasury). We have processed all withdrawals, and will continue to do so.”
Still, the tweet did little to calm concerns, and customers began withdrawing their money from the exchange, creating a liquidity crisis for FTX.
Then around 11 a.m. ET, Bankman-Fried announced that FTX would sell its non-US operations to Binance to solve the liquidity crisis the company was facing due to withdrawal requests. Binance will conduct due diligence on the company in the coming days. The price of Bitcoin immediately jumped $1,300 on the news.
“Our teams are working to clear the withdrawal backlog as it stands,” Bankman-Fried said in a tweet after the deal. “This will remove liquidity crises; all assets will be covered 1:1. This is one of the main reasons we have asked Binance to come in. It may take some time to settle etc. — we apologize for that.”
What now
MicroStrategy and Riot are probably only moving with the price of Bitcoin today because both companies have a lot of Bitcoin tokens.
Since Coinbase itself is a crypto exchange, shareholders may have been concerned to see this happen to another exchange. But Coinbase still had more than $5 billion in cash and cash equivalents on its balance sheet at the end of the third quarter.
Ultimately, I still think Coinbase is a hold given that I think it will be relevant as long as crypto trading is. The crypto winter has been tough for the company, but I think it can survive and bounce back in the long run. I am far less interested in MicroStrategy and Riot and prefer to just buy Bitcoin instead.
Bram Berkowitz has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool has a disclosure policy.
