The cryptocurrency market has always been unstable, and it still is now. The first week of November has been terrible for the market. There are several causes for this. The cryptocurrency exchange Binance is one of the main reasons. The crypto market crashed when Binance announced it was exiting a deal to buy a struggling competitor, FTX Trading.
After Binance verified prior rumors and media reports that it was about to withdraw from the FTX transaction, Bitcoin fell to a two-year low. Initially, Binance announced it would buy FTX. However, the agreement was subject to Binance performing its thorough research on FTX’s balance sheet. Binance decided to pull out of the deal and it had terrible consequences for the crypto market. Let’s look at more details.
Why Did Binance Pull Out Of The Deal?
The growing controversy at FTX is most likely to blame for the cryptocurrency crash. The CEO of Binance, Changpeng Zhao, declared that Binance would buy FTX because of a serious liquidity situation at FTX. Binance is the largest centralized cryptocurrency exchange, and FTX was among its main rivals.
However, soon after announcing the agreement, Binance backed out of the deal, further shocking the market. After experiencing what could be compared to a bank run in the crypto community, FTX decided to sell itself to Binance.
Binance stated that it had serious reservations that led it to withdraw from the agreement. It stated, “At first, our wish was to be capable of assisting FTX’s clients in providing cash flow, but the problems are beyond our command or capacity to assist.”
As per CoinDesk, the Bitcoin price dropped by more than 12% reaching $16,084. Since December 2020, this level has been at its lowest. At the beginning of the week, it had surpassed $20,000. Ethereum, the other significant cryptocurrency, fell by 13%. Even amid Fed rate hikes, falling foreign assets, stock market crashes, and the ongoing conflict in Ukraine, Bitcoin, and Ethereum were relatively steady. However, the values have stayed low when compared to 2021.
According to Craig Erlam, the senior industry analyst at Oanda, “Bitcoin has historically correlated with wider risk appetite in the marketplace, but it is obvious that Tuesday, November 8th, was certainly not one of those days.” Cryptocurrencies have taken a hit at the beginning of the week, with Bitcoin dropping nearly 20% in two days at one point due to worries about FTX and the potential effects on the FTT token.
FTT, FTX’s cryptocurrency token, fell more than 50% in response to the reports. A week ago, the token was valued ten times more than what it is now, or roughly $2.50. In addition, several investors were worried whether Alameda Research, an FTX subsidiary company, had an excessive amount of progressively useless FTT tokens on its balance sheet.
The exchange’s obligations would not be exceeded by the total value, rendering FTX bankrupt. As reported by the Wall Street Journal, Bankman-Fried requested $8 billion from his investors to pay for withdrawal demands, further highlighting FTX’s difficult financial circumstances.
As per Bloomberg News and other news outlets, U.S. officials are currently looking into FTX for how it treated customer deposits. On hearing the news, stocks of publicly listed exchanges that deal in cryptocurrency also fell. For example, Coinbase stocks lost over 10%, while Robinhood’s shares fell almost 14%.
As the value of crypto assets has fallen, FTX is the fourth cryptocurrency startup that has experienced financial hardship this year. Other companies include Three Arrows Capital, an Asian hedge fund, and Celsius, a business that resembled a bank and accepted cryptocurrency funds in return for yield.