It's a difficult time ahead for crypto investors.
Just when they thought the wounds caused in the summer by a credit crunch at prominent lenders like Voyager Digital and Celsius Network were about to be healed, new wounds have just been inflicted upon them.
The crypto empire of former billionaire Sam Bankman-Fried, 30, is crumbling for lack of a savior. On Nov. 8, Binance, the world's leading cryptocurrency exchange, said it would acquire its rival and also Alameda Research, another Bankman-Fried trading platform.
'The Issues Are Beyond Our Control'
But the company had warned that the deal would only be finalized after due diligence. Some 24 hours later, Changpeng Zhao, CEO of Binance, announced that his firm was dropping the deal.
"As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of http://FTX.com," Binance said in a statement.
"In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help."
The firm does not provide any information on the issues Binance teams discovered while opening FTX's books. But according to press reports, Binance has discovered a financial black hole, which means a gap between the liabilities and the assets of FTX. And this amounted to over $6 billion.
Now, the consequences for clients of FTX and its sister trading platform Alameda Research are only unknowns. Their customers seem likely to lose their money. Binance also seemed to suggest that there has been malpractice at FTX.
"Every time a major player in an industry fails, retail consumers will suffer," Zhao also said. "We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market."
'You Don't Know Anything'
FTX.com, which counts sports stars Tom Brady and Stephen Curry as ambassadors, was valued at $32 billion in a February funding round. But following its financial difficulties, the company is worth only $1, according to Bloomberg News.
FTT, the cryptocurrency issued by the platform, crashed nearly 60% at $2.29 on Nov. 9, according to data from CoinGecko. It's a real rout for a cryptocurrency that had risen to $84.18 on Sept. 9, 2021. This token, which is an indication of the value of FTX, has a market value of $2.2 billion as of time of writing. The time to count their losses has come for FTX customers.
Michael Burry, the legendary investor who bet on the subprime mortgage meltdown that sparked the 2008 financial crisis, has advice for them and other investors interested in crypto: don't touch it if you don't want to burn your fingers because there is too much leverage.
"The problem with #crypto, as in most things, is the leverage," the financier said on Twitter on Nov. 9. "If you don't know how much leverage is in crypto, you don't know anything about crypto, no matter how much else you think you know."
The problem with crypto is that you can use the same coin as collateral to borrow multiple times against it. There is no transparency in the market to determine whether the same coin has already been used as collateral.
Unlike an every day example of a house which cannot be used to obtain multiple mortgages as there are records allowing a bank to confirm whether a house already has a mortgage against it.
The fall of Bankman-Fried and FTX was swift: on Nov. 6, Binance said it would sell for $500 million FTT coins after news reports that the firm was on the brink of insolvency.
On Nov. 7, Bankman-Fried said everything was fine but 24 hours later he called Binance for help.
