FTT, the token native to crypto exchange FTX, lost most of its value after rival Binance, the world’s largest cryptocurrency firm, announced plans to buy the company.
The coin traded at around $22 on Monday and dipped below $5 on Tuesday afternoon in New York. The selloff wiped out more than $2 billion in value in 24 hours.
Binance CEO Changpeng Zhao, known as CZ, wrote in a tweet to his more than 7 million followers that he expects FTT to be “very volatile in the coming days as things develop.”
Cryptocurrencies as a class sank on Tuesday, with bitcoin and ethereum both down more than 10%. Shares of crypto exchange Coin base also experienced a double-digit percentage decline, while Robin Hoodwhich traders use to buy and sell crypto, fell by about 19%.
“It’s probably the most dramatic deal I’ve ever seen in the history of the crypto industry,” said Nic Carter, partner at Castle Island Ventures, which focuses on blockchain investments. “It basically consolidates the two largest offshore exchanges into one entity, an absolute coup for CZ and Binance – and truly a disaster for FTX.”
The agreement between the two companies is non-binding and follows what FTX CEO Sam Bankman-Fried called “liquidity crunches” at his company, which was valued at $32 billion in a funding round earlier this year.
The acquisition affects only the non-US companies for FTX. The US division remains independent of Binance. However, according to a 2021 audit, the American part of FTX only accounted for 5% of total revenue. FTX is based in the Bahamas, where Bankman-Fried resides.
Like many crypto companies, FTX created its own token called FTT, which could be bought like bitcoin, although it was not as widely available. Owners of FTT were promised lower trading costs and the ability to earn interest and rewards as waived blockchain fees. While investors can profit when FTT and other coins increase in value, they are largely unregulated and are particularly susceptible to market downturns.
In 2019, Binance announced a strategic investment in FTX, saying that as part of the deal it had taken “a long-term position in FTX Token (FTT) to help enable sustainable growth of the FTX ecosystem.”
Due to Binance’s central position in crypto and its large ownership of FTT, the company had particular influence on FTX and the market’s view of the company. Investor confidence in FTX was shaken over the weekend when Zhao tweeted that Binance would sell its holdings of FTT.
Zhao said Binance had about $2.1 billion worth of FTT and BUSD, its own stablecoin.
“Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” he said.
FTT, which peaked at around $78 in September 2021, was trading at close to $25 the day before Zhao’s tweets. It dipped below $16 on Monday and then fell off a cliff after the deal was announced on Tuesday. According to CoinMarketCap, the value of FTT’s circulating supply is around $735 million, down from $2.9 billion on Monday.
Bankman-Fried said that in the 72 hours to Tuesday morning there had been about $6 billion in net withdrawals from FTX, according to Reuters. On an average day, the net inflow is in the tens of millions of dollars.
“The fact that Sam was willing to do this deal suggests that FTX was deeply weakened by the run on the bank that began in the last 48 hours,” Carter said. “We don’t know exactly what the problem was, whether they were lending or playing with user deposits.”
FTX did not respond to CNBC’s multiple requests for comment.
Earlier on Tuesday, FTX had halted withdrawals from its platform after spooked investors tried to withdraw their funds – in a move similar to the collapse of other crypto firms this year, including Celsius, Voyager Digital and Three Arrows Capital.
News of FTT sparked concern about Alameda Research, Bankman-Fried’s trading firm and sister company to FTX. A report last week on the state of Alameda’s finances showed that a large portion of its balance sheet is concentrated in FTT, and its various activities leveraged the token as collateral. Alameda has disputed that claim, saying the FTT represents only a portion of its overall balance sheet.
“If the price of FTT goes way down, then Alameda could face margin calls and all kinds of pressure,” said Jeff Dorman, chief investment officer at digital asset firm Arca. “If FTX is the lender to Alameda, then everybody is going to be in trouble.”
— CNBC’s Kate Rooney and Tanaya Machel the contribution to this report.