Despite preparations for a rescue offer from bigger rival Binance, cryptocurrencies experienced a second day of steep falls on Wednesday as investors remained concerned about the viability of the industry and the financial state of major exchange FTX.
To address a “liquidity bottleneck” at the competing exchange, cryptocurrency giant Binance reached a non-binding deal on Tuesday to purchase FTX’s non-U.S. unit.
Following a week of rumours concerning FTX’s financial stability, $6 billion in withdrawals occurred in the 72 hours before the proposed agreement on Tuesday, casting doubt on the viability of one of the largest cryptocurrency exchanges on the planet.
Markets are now again uncertain about the agreement’s future because FTX & Binance did not reveal its details.
After a 10% decline on Tuesday, which was its worst day since mid-August, Bitcoin, the most valuable cryptocurrency by market cap, was lower by 5.3% that day at $17,559 at 11:07 GMT. The second-largest cryptocurrency, ether, continued to decline on Wednesday and hit its lowest level since July.
After falling 72% on Tuesday, FTT, the smaller coin connected to FTX, was under another 23% today. According to data from CoinGecko, its market cap decreased to just $600 million from about $3 billion at the beginning of the week.
What if the deal is unsuccessful or (Changpeng Zhao, CEO of Binance) replies that he will offer 10 cents on the dollar? According to Scottie Siu, investments director at Hong Kong-based Axion Global Asset Management, that is the blind spot for which the market is not yet prepared.
The unrest at FTX is the most recent indication of difficulty in the quickly developing cryptocurrency industry. As investors fled riskier assets due to a general decline in financial markets, cryptocurrency values have fallen so far this year. Bitcoin is down about 62% in 2022 after experiencing a significant rise in 2020 and 2021.
Investors should exercise caution for a while, as per Kami Zeng, director of research at Fore Elite Capital Management, one of the many Hong Kong-based cryptocurrency fund managers. She called this another “alarm warning” for the market.
Still, everything appears to be a pitch-black void. Although it’s unclear how contagious this would be, institutions are thought to need to demonstrate their proof of holdings as soon as possible. Before that, confidence cannot return, according to Zeng.
The token utilised on Binance, called Binance coin, also suffered. With a market cap of close to $50 billion, the fourth-largest cryptocurrency in the world was trading at $299, lower by 8.8% on the day.
Some experts compared the situation to the demise of the stablecoin TerraUSD and its associated token Luna earlier this year, which triggered a string of additional bankruptcies at Singapore funds Three Arrows Capital and the American fintech companies Voyager Digital and Celsius.
Users of FTX can purchase, sell, and hold cryptocurrencies on the site.
Sam Bankman-Fried, the company’s CEO, stated that his teams were striving to reduce the backlog of withdrawals, despite market jitters on the status of the bailout and the severity of the issues.
As per Fabian Astic, director of DeFi & digital assets at the Moody’s Investors Service, cryptocurrency players are responding to news and rumours more quickly than those in traditional banking, which accelerates the development of a liquidity crisis.
He linked this to the cryptocurrency industry’s uneven regulation and lack of transparency.
The regulators’ reaction to a transaction between the two cryptocurrency exchanges remains unclear. Antitrust experts warned that U.S. antitrust enforcers might insist on examining the merger.
According to Bankman-Fried, a California native who now resides in the Bahamas, where FTX is headquartered, the U.S. activities of Binance or FTX are not covered by the agreement.
The U.S. is also looking at Binance. Justice Department for potential money-laundering regulation breaches. This year has seen several inquiries into Binance’s problematic past with financial regulatory requirements.
Temasek Holdings, a shareholder in FTX and a state investor in Singapore, stated in email remarks that they are conversing with FTX in their role as a stakeholder and are aware of the developments involving FTX and Binance.