SINGAPORE/LONDON, Nov 9 (Reuters) – Cryptocurrencies saw a second day of sharp declines on Wednesday as investors continued to worry about the stability of the sector and the financial health of the main exchange FTX despite the plans for a bailout deal from biggest rival Binance.
Crypto giant Binance on Tuesday signed a non-binding agreement to buy FTX’s non-US unit to help cover a “cash shortage” on the rival exchange.
The proposed deal between high-profile rivals follows week-long speculation over FTX’s financial health that snowballed into $6 billion in withdrawals in the 72 hours before Tuesday’s deal, raising questions about the creditworthiness of one of the largest crypto exchanges in the world.
FTX and Binance have not disclosed the terms of their deal, and markets are facing further uncertainty over its continuation.
Bitcoin, the largest cryptocurrency by market value, fell 5.3% on the day to $17,559 as of 11:07 GMT, following a 10% drop on Tuesday that marked its worst day since mid-August. Ether, the second-largest, extended its losses on Wednesday to hit its lowest level since July.
FTT, the smallest token linked to FTX, is down another 23%, after plunging 72% on Tuesday. Its market capitalization has fallen below $600 million, from around $3 billion at the start of the week, according to data from CoinGecko.
“What if the deal doesn’t happen, or (Binance CEO Changpeng Zhao) comes back and says I’ll give 10c on the dollar. That’s the blind spot the market isn’t ready for,” said Scottie Siu, chief investment officer at Axion Global Asset Management in Hong Kong.
The turmoil at FTX is the latest sign of trouble in the rapidly changing world of cryptocurrencies. Crypto prices have fallen so far this year as a broader downturn in financial markets prompted investors to dump riskier assets. After rapid growth in 2020 and 2021, bitcoin is down around 62% in 2022.
Kami Zeng, head of research at Fore Elite Capital Management, a Hong Kong-based crypto fund manager, called it another “red flag” for the market and said investors should be cautious for a while. time.
“…it all still looks like a black hole. We don’t know how contagious it could be, but I think institutions need to show their evidence of reserves as soon as possible. Trust doesn’t recover until then” , said Zeng.
Binance coin, the token used on Binance, was also not spared. The world’s fourth-largest cryptocurrency, with a market value close to $50 billion, was at $299, down 8.8% on the day.
RISKS OF CONTAGION
Some analysts have drawn a parallel with the collapse of stablecoin TerraUSD and its related token Luna earlier this year, which triggered a string of other bankruptcies by Singaporean fund Three Arrows Capital and US fintech firms Voyager Digital and Celsius.
FTX allows users to buy and trade cryptocurrencies, which can be held on the platform.
Its CEO, Sam Bankman-Fried, said his teams were working to clear the backlog of withdrawals, although uncertainty in the market over the status of the bailout and the depth of the problems had traders nervous.
“Crypto players react faster to news and rumors, which in turn creates a liquidity crisis much faster than what we would have seen in traditional finance,” said Fabian Astic, head of DeFi. and digital assets at Moody’s Investors Service.
He attributed this to the “limited transparency and uneven regulation of cryptofinance”.
It is unclear how regulators will view a deal between the two crypto exchanges. U.S. antitrust authorities may insist on reviewing the merger, antitrust experts said.
Binance and FTX’s U.S. operations are not part of the deal, said Bankman-Fried, who is originally from California but lives in the Bahamas, where FTX is based.
Binance is also under investigation by the US Department of Justice for possible violations of money laundering rules, Reuters reported last week. This is part of a series of investigations this year into Binance’s troubled history with financial regulatory compliance.
Singaporean public investor Temasek Holdings, a shareholder of FTX, said in comments emailed to Reuters: “We are aware of the developments between FTX and Binance, and engage FTX as a shareholder.”
Reporting by Selena Li and Tom Westbrook; Additional reporting by Georgina Lee, Anshuman Daga and Vidya Ranganathan; Written by Vidya Ranganathan; Editing by Bradley Perrett and Toby Chopra
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