Cryptocurrencies fall after FTX-Binance turmoil spooks investors

The cryptocurrency market has seen a second day with sharp declines. Investors continue to worry about the sector’s stability and financial health of major exchange FTX despite plans of a rescue plan by Binance, a bigger rival.

After weeks of speculation about FTX’s financial health, which culminated in $6 billion of withdrawals within 72 hours of Tuesday’s deal, the proposed deal was reached between two high-profile rivals. This raises questions about the solvency and sustainability of one of the largest crypto exchanges worldwide.

FTX, Binance and others did not disclose the terms of their agreement. Markets are now uncertain if it will be implemented.

Bitcoin, the largest cryptocurrency in terms of market value, fell 5.3% to $17,559 at 1107 GMT. This was after a Tuesday 10% plunge that marked its worst day for a while. Ether, the second largest cryptocurrency, suffered further losses Wednesday, hitting its lowest level since July.

FTT – the smaller token that is tied to FTX – was also down 23% after it collapsed 72% on Tuesday. According to CoinGecko data, its market cap fell below $600million, from $3 billion at the beginning of the week.

“What if the deal does not go through? Or (Binance CEO Changpeng Zhao), comes back and tells me that I’ll give 10c per dollar. Scottie Siu (investment director at AxionGlobal Asset Management in Hong Kong) said that this is the blind spot the market has not prepared for.

The latest sign of trouble in the fast-moving cryptocurrency world is the turmoil at FTX. Due to a wider downturn in financial markets, crypto prices have plummeted so far this year. Investors were forced to sell more risky assets. Bitcoin is expected to drop 62% by 2022 after experiencing rapid growth in 2020-2021.

Kami Zeng (head of research at Fore Elite Capital Management in Hong Kong), called this an “alarm warning” to the market, and advised investors to be cautious for a while.

“… The whole thing still seems like a dark hole. Although we don’t know how contagious it could be, I think institutions should immediately show proof of their reserves. Zeng stated that confidence does not recover prior to this.

Binance coin, the token that is used on Binance was also not spared. The market value of the fourth largest cryptocurrency in the world, Binance coin, was close to $50 billion. Its price was $299, 8.8% lower than on the previous day.

Analysts saw parallels to the earlier collapse of TerraUSD and its linked token Luna in this year’s stablecoin. This set off a string of bankruptcies at Three Arrows Capital in Singapore and U.S. fintech companies Voyager Digital, and Celsius.

FTX lets users trade and buys cryptocurrencies. These cryptocurrencies can also be stored on the platform.

Sam Bankman-Fried, the CEO of the company, said that his teams were clearing the withdrawal backlog. However, traders remain nervous about the status of the bailout and the extent of the problems.

Fabian Astic, Moody’s Investors Service head of DeFi, said that “crypto players are reacting faster to news and rumours which in turn creates a liquidity crisis much quicker than one would have observed in traditional finance.”

He blamed this on the “limited transparency, and uneven regulation of crypto finance”.

It is unclear how regulators will view a deal between two crypto exchanges. Antitrust experts suggested that the U.S. could insist on investigating the merger.

Bankman-Fried said that the U.S. operations of Binance and FTX were not included in the deal. He is from California, but he lives in the Bahamas where FTX is based.

The U.S. Justice Department is also investigating Binance for possible money-laundering violations, Reuters reported last Wednesday. This is just one of several investigations into Binance’s history of financial regulatory compliance violations.

Temasek Holdings, a Singapore state investor, stated in emailed comments that Reuters: “We are conscious of the developments between FTX, Binance, and we are engaging FTX as our shareholder.”

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