New York CNN Business — It was a jaw-dropping, curse-out-loud-at-work kind of day in the crypto world, which, even on its best day, is a volatile and weird place.
Here’s the deal: Cryptos were down all morning on concerns about 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 “wunderkind,” “savior,” white knight, “digital Warren Buffett,” etc. He is, in short, a crypto celebrity (and a 30-year-old billionaire).
SBF had dismissed rumors about FTX’s liquidity problems, even as its larger rival, Binance, said it would liquidate $580 billion it held in FTX’s in-house token.
Then, in a truly unexpected twist, Binance said it had offered to buy FTX to resolve its liquidity crisis.
“This afternoon, FTX asked for our help,” tweeted Zhao “CZ” Changpeng, the CEO of Binance, on Tuesday, citing a “significant liquidity crunch.”
Pretty much no one saw that bombshell coming, given the public feuding and apparent bad blood between Bankman-Fried and Zhao.
“I’m actually shocked by this,” an industry executive told me. “FTX failing … would be kind of like a Lehman Brothers event for the space. But if they have been successfully bailed out, then that would probably head things off at the pass.”
While the deal is still in flux, a tie-up between FTX and Binance would, the two largest crypto exchanges by volume, would mark a tectonic power shift in the industry.
The news prompted a brief recovery in digital assets but wasn’t enough to calm anxious investors.
Bitcoin tumbled more than 10% Tuesday to hit a 52-week low around $17,600, according to CoinDesk. FTX’s in-house coin FTT cratered to $5.24, losing 75% of its value. Other digital assets and equities tied to the industry, such as Coinbase, also fell.
SBF is one of the most influential figures in crypto. Over the summer, as digital assets tumbled in the so-called “crypto winter,” Bankman-Friedponied up about $1 billion to bail out firms and shore up assets to try to keep the entire industry from collapsing. He also became the unofficial ambassador, peddling the promise of crypto to a skeptical mainstream financial world.
On Tuesday, though, the savior needed to be saved.
Fears over FTX and Alameda Research, Bankman-Fried’s trading house, began last week after a report published by news site CoinDesk suggested that much of Alameda’s balance sheet was made up of FTT, which is a relatively illiquid token.
Those fears were fanned by none other than Zhao, the head of Binance, who said his company would sell all of its holdings — about $580 million — in FTT, “due to recent revelations.” His announcement spooked investors and caused FTT to plummet.
In essence, Bankman-Fried was getting a capital call for $580 million, and didn’t have the liquidity to meet it.
What happens now?
There’s a lot to figure out still, but we can expect digital assets to remain volatile until more details about the FTX-Binance deal are made public. Some analysts say the tie-up could accelerate the push toward crypto regulation by Washington.
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 if Binance finds itself in trouble.
NUMBER OF THE DAY: $2.04 billion
Alas, I will not be quitting my day job after all. That privilege goes to a lucky ticket holder in California, the sole winner of the record $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: “Somebody is holding on to a very important piece of paper this morning.”
Much of the world is, rightly, preoccupied with the midterms. But Wall Street is already casting its gaze to Thursday, when the all-important Consumer Price Index report will give us an updated read on inflation.
“Obviously this midterm election — because democracy is on the ballot — is a big deal in the eyes of the population,” Peter Tuchman, a veteran New York Stock Exchange floor trader, told my colleague Matt Egan. “But how much it weighs on the economy is a good question.”
In short, only a major upset could effect the market reaction at this point. Stocks have rallied in recent days in part because investors are betting Republicans will take control of at least one chamber, leading to divided government.
Division means gridlock. And Wall Street loves gridlock.
In this case, gridlock will mean Republicans can’t pass unfunded tax cuts, and Democrats can’t push through unfunded spending programs — both of which would worsen inflation that is already at decades-high levels, andlift interest rates, Matt explains.
“Less government, complete gridlock, will probably benefit the stock market,” said Tuchman.
Several traders told Matt the midterm election may easily be overshadowed by Thursday’s CPI, arguably the most important economic metric of the month.
“Markets can adapt to virtually anything except unknowns,” Tuchman said. “The largest long-term unknown in the market is the inflation story.”