- The crypto world is pinning its hopes on Binance acquiring FTX after yesterday’s implosion
- Binance is currently conducting due diligence on FTX after helping it out of a $6 billion hole
- If FTX isn’t acquired, the impact on the crypto world could be temporarily catastrophic
The fallout from the FTX implosion will be long and will have many as yet unforeseen consequences, but one more immediate issue is the impact this will have on the crypto contagion epidemic that was kickstarted by the Terra/LUNA affair. Binance is currently investigating whether it wants to buy FTX (and its debts), but the celebratory mood has quickly vanished as the crypto world starts to consider what might happen if it chooses not to go through with the deal. Could crypto be about to face its first Lehman Brothers moment?
Binance Doing Due Diligence This Week
Binance CEO Changpeng Zhao said yesterday that the company had “signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch”, adding that it would be “conducting a full DD in the coming days.” This gives the crypto space a week in which to recover from the speed of the events that have taken place in the last week and what might happen going forward.
In situations like this, huge numbers get thrown about, not all of them synchronous across reporting outlets and sometimes making little sense. With FTX, we simply don’t know the full extent of the loans it took out to boost its speculation activities. What we do know is that Alameda Research seems to have had a total of about $8 billion in loans against their assets, $5.82 billion of which was FTT alongside a bunch of locked SRM and SOL.
With the value of this collateral now reduced to insignificance (FTT is currently trading at $5), Alameda and FTX are now in the hole for billions of dollars to other companies, many of whom have been recently papering over fissures caused by the lack of repayments coming from collapsed firms such as Three Arrows Capital and Celsius. Many of these creditors simply can’t afford to write off loan repayments from Alameda/FTX, meaning that they could very well go under if Binance chooses not to go ahead with the deal, taking user funds with them.
Crypto Lending Space Could be Decimated
This game of financially ruinous dominos will continue down the chain, knocking out companies that have managed to survive until now. It’s no exaggeration to say that the entire crypto lending space could be decimated if Binance decides that it doesn’t want FTX’s risk.
And let’s be clear about this – CZ is not required to do anything here. He is not some Heaven-sent saviour on a mission to save crypto. He is a businessman who wants Binance to be the king of the space, as he has demonstrated ruthlessly in the past week, and he will do what’s best for his business, not the people.
The situation is not dissimilar to 2008 when the Federal Reserve refused to bail out Lehman Brothers, leaving other banks to be Lehman’s only possible recourse to salvation. However, none of the other banks wanted anything to do with Lehman’s toxic assets and they let it die, taking steps instead to save themselves.
Situation Doesn’t Look Promising
Zhao will not make a decision on FTX until the due diligence has been done, but these comments from Coinbase CEO Brian Armstrong should give us pause for thought before we anointed him as crypto Jesus:
Brian refusing to come anywhere near this radioactive wasteland
“There’s reasons why that would not make sense…..I’m not at liberty to share the details right now…..it’ll all probably come out eventually.”
This seems more nefarious than lending customer deposits to Alameda https://t.co/vG4aGe1Pcg
— Hsaka (@HsakaTrades) November 9, 2022
If the events of the past week haven’t been enough of a reminder, storing your coins in your own wallet is always the best option. And remember that there is no such thing as ‘too big to fail’.