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It’s been a breathtaking day in the crypto world, which is a volatile and strange place even on its best day.
Here’s the deal: Cryptos have been down all morning over concerns over the solvency of FTX, the exchange platform founded by Sam Bankman-Fried, aka SBF. He’s an entrepreneur whose name often appears alongside descriptors like “child prodigy,” “savior,” white knight, “digital Warren Buffett,” etc. In short, he’s a crypto celebrity (and a 30-year-old billionaire).
SBF had denied rumors of FTX’s liquidity problems, although its larger rival Binance said it would liquidate $580 billion it held in FTX’s internal token.
Then, in a really unexpected twist, Binance said it had offered to buy FTX to solve its liquidity crisis.
“This afternoon FTX asked for our help,” Binance CEO Zhao “CZ” Changpeng tweeted Tuesday, citing a “significant liquidity crisis.”
Given the public feuds and obvious bad blood between Bankman-Fried and Zhao, pretty much nobody saw this bombshell coming.
“I’m really shocked by this,” an industry leader told me. “FTX fails… would be sort of a Lehman Brothers event for space. But if they were successfully rescued, that would probably end 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 sparked a brief rebound in digital assets, but wasn’t enough to reassure worried investors.
Bitcoin plummeted more than 10% on Tuesday, according to CoinDesk, hitting a 52-week low of around $17,600. FTX’s proprietary coin FTT cratered to $5.24, losing 75% of its value. Other digital assets and stocks tied to the industry, like Coinbase, also fell.
SBF is one of the most influential figures in the crypto space. Over the summer, as digital assets plummeted in the so-called “crypto winter,” Bankman-Fried said Raised about $1 billion to bail out businesses and prop up assets to try to prevent the entire industry from collapsing. He also became the unofficial ambassador, selling the promise of crypto to a skeptical mainstream financial community.
On Tuesday, however, the rescuer had to be rescued.
Fears over FTX and Alameda Research, Bankman-Fried’s trading house, began last week after a report published by news site CoinDesk indicated that much of Alameda’s balance sheet was made up of FTT, a relatively illiquid token.
Those fears were fueled by none other than Zhao, the head of Binance, who said his company will sell all of its holdings in FTT — about $580 million — “due to the recent revelations.” His announcement spooked investors and sent the FTT plummeting.
Essentially, Bankman-Fried received a $580 million capital call and didn’t have the liquidity to meet it.
What’s happening now?
There is still much to be found out, but we can expect digital assets to remain volatile until more details about the FTX-Binance deal are released. Some analysts say the connection could accelerate Washington’s push toward crypto regulation.
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 shoulder the next bailout should Binance run into trouble.
Unfortunately, I’m not going to quit my job after all. This privilege goes to one lucky ticket holder in California, the sole winner of the record-breaking $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 come forward, a representative told CNN, adding, “Someone is holding onto a very important piece of paper this morning.”
Much of the world is rightly preoccupied with the midterms. But Wall Street is already eyeing Thursday when the all-important CPI 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 people,” Peter Tuchman, a veteran floor trader on the New York Stock Exchange, told my colleague Matt Egan. “But how much it weighs on the economy is a good question.”
In short, only a major disruption could affect the market reaction at this point. Stocks have rallied in part in recent days as investors bet Republicans will take control of at least one chamber, resulting in a divided government.
Division means stagnation. And Wall Street loves standstill.
In this case, the deadlock means Republicans can’t pass unfunded tax cuts and Democrats can’t pass unfunded spending programs — both of which would exacerbate inflation, which is already at decades-old levels, and Raise interest rates, Matt explains.
“Less government, total shutdown, will likely benefit the stock market,” Tuchman said.
Several traders told Matt that the midterm election could easily be overshadowed by Thursday’s CPI, arguably the month’s most important economic reading.
“Markets can adapt to pretty much anything except the unknown,” said Tuchman. “The biggest long-term unknown in the market is the inflation story.”