What happened with the Binance FTX Bailout?

November 10, 2022 • Reading Time: 6 minutes

FTX has crashed. Binance seemed close to acquiring them, but then backed out. Bitcoin and Crypto Twitter are on fire, talking about perhaps the biggest event to shake the crypto markets since the collapse of Terra Luna. And for good reason.This is bigger than Terra Luna.FTX.com went from a ~$40 billion behemoth, to being valued at approximately negative $9 billion.Billions of dollars of customer funds are likely lost.This is the story of Binance and the FTX crash.

So What Happened with FTX?

To understand the story, we have to rewind by a few years. In December 2019, Binance announced a strategic investment in an up-and-coming crypto exchange, FTX.com.FTX.com was helmed by Sam Bankman-Fried (SBF), a big name in the crypto world who made his fortunes and fame taking advantage of an arbitrage opportunity between South Korea and North American prices of Bitcoin, also referred to as the Kimchi Premium. Binance became an early investor, and importantly, became significant owners in a large stake in the FTX.com exchange token, $FTT.Over the coming years, FTX.com grows to become one of the largest crypto exchanges in the world. In fact, FTX.com was the 2nd largest crypto exchange by volume, second only to Binance.You all saw the ads. The partnerships with sports stars, celebrities, Hollywood, and so on. FTX.com was a rising star.

SBF Flies Too Close To The Sun

It’s unclear the exact series of events, but what is well known is that SBF was lobbying to Congress for stronger regulations in the crypto industry.Changpeng Zhao (CZ) of Binance, does not seem to have loved that idea.

Binance proceeded to sell their holdings of $FTT, which amounts to approximately $2 billion. To make matters worse for FTX, they also publicly announced this action.This caused a cascade of liquidations as customers frantically tried to sell their $FTT token. Under normal circumstances, this would simply mean that $FTT token would trade at a lower price.However, these were not normal circumstances.

The Dominos Start To Fall, and FTX Goes Down

FTX.com was holding a large portion of their balance sheet in $FTT token.To make matters even worse, it appears very plausible that FTX had lent Alameda Research (SBF’s hedge fund and pseudo-sister company to FTX) billions of dollars worth of customer assets, using FTT as collateral.In summary, the dropping price of the FTT token completely re-prices the balance sheets of FTX and Alameda Research.Customers start withdrawing their funds from FTX. And this is where the “run on the bank” begins.FTX simply does not have the cash to pay customers for all their withdrawals.They are illiquid.This all happens extremely fast. Within hours, SBF tweets that FTX.com is facing liquidity issues, and that Binance has agreed to acquire them.

But we’re not done yet.

Binance Backs Out Of The Deal to Acquire FTX

The next day, on November 9th, Binance announces at 4pm EST that they are officially backing out of the deal.They are no longer bailing out FTX.They cite their corporate due diligence as well as “news reports regarding mishandled customer funds and alleged US agency investigations”.

This is a very sad and unfortunate event for the customers that trusted their money with FTX.Within 48 hours, SBF went from a celebrity and hero in the crypto world, to one of the biggest villains.

Lessons Learned

There are lessons to be learned from the Binance and FTX saga.There is an old adage in the Bitcoin space:“Not your keys, not your Bitcoin.”Buying Bitcoin and leaving it on an exchange exposes you to counter-party risk. If anything happens to the exchange, your funds are at risk.Customers of FTX have learned this lesson the hard way. The situation is evolving very quickly, but it is highly likely that over $8 billion of customer funds have been lost.Sequoia Capital, who invested $150 million in FTX, has marked down their investment to $0.

Crypto is an incredibly risky industry.Yes, risk can create outsized returns to the upside.But risk can also create an equal move to the downside.Learn more about how to build your wealth at Wealth Potion.

Predictions for the Future

At Wealth Potion, here are a few things we believe will happen:1. This will open the floodgates for more regulation in the crypto industry. This will be good for the industry as a whole, especially Bitcoin.2. This will turn many people away from crypto as a whole. The overall sentiment on crypto was quite negative due to the bear market, and this event will make things even worse.3. New Bitcoiners will be minted this cycle. The savvy, open-minded, and curious folks who are following this saga will ask important questions. Why did FTX.com need a token? What is the purpose of all these cryptocurrencies? What is innovative about Bitcoin?The saga of the Binance acquisition attempt and FTX crash will undoubtedly go down as one of the most pivotal moments in the crypto industry. And despite the fear in the markets, it’s important that we remember why we invest in the assets we hold.There is only one Bitcoin!