Cryptocurrency prices plunged for the second day in a row after cryptocurrency exchange Binance said it was pulling out of a deal to buy bankrupt rival FTX Trading.
Bitcoin sank to a two-year low after Binance confirmed rumors and earlier news reports that it was ready to pull out of the FTX deal, reached between the CEOs of the two exchanges on Tuesday. The deal was pending Binance due diligence on the FTX balance sheet.
After an initial review, Binance said in a statement on Wednesday that it had significant concerns that convinced it to withdraw from the deal.
“Initially, our hope was to be able to help FTX clients provide liquidity, but the issues are beyond our control or ability to help,” Binance said in a statement.
The bitcoin price plunged more than 13% to $15,840, according to CoinDesk, its lowest level since November 2020. It had been above $20,000 earlier in the week. The other major cryptocurrency, Ethereum, fell 13%.
FTX agreed to sell to Binance after experiencing the cryptocurrency equivalent of a bank run. Clients left the exchange after worrying about whether FTX had enough capital. The flash sale was a surprising turnaround for FTX CEO and founder Sam Bankman-Fried, who was hailed as a savior earlier this year when he helped prop up a string of cryptocurrency companies that ran into financial trouble.
FTX’s own crypto token, known as FTT, is down more than 50% on reports. The token, now worth around $2.50, was worth 10 times that amount just a week ago. Many of the concerns from crypto investors centered on whether the balance sheet of an FTX-affiliated company known as Alameda Research was saturated with increasingly worthless FTT tokens, the total value of which would not exceed the exchange’s liabilities, effectively causing FTX was insolvent.
After Binance had a chance to look at the FTX books, it became clear that the problem was too big to solve. A person familiar with the matter, who could not speak publicly because she was not authorized, described the books as a “black hole” in which it was impossible to differentiate between the assets and liabilities of FTX the exchange and those of Alameda Research. hedge fund
“The books were a nightmare, and the relationship between FTX and Alameda was incestuous at best,” the person familiar with the matter said.
In another illustration of FTX’s financial difficulties, Bankman-Fried asked its investors on Wednesday for $8 billion to cover withdrawal requests, according to The Wall Street Journal, citing unnamed sources.
FTX is reportedly now under investigation by US authorities for the way it handled customer deposits, according to Bloomberg News and other media outlets.
Shares of publicly traded exchanges exposed to cryptocurrencies also plunged due to the developments. Robinhood shares closed down about 14% and Coinbase shares lost about 10%.
FTX is the latest cryptocurrency company this year to come under financial pressure as crypto assets have collapsed in value. Other failures include Celsius, a bank-like company that received crypto deposits in exchange for performance, as well as an Asia-based hedge fund known as Three Arrows Capital.