What happened
The entire crypto industry, from cryptocurrencies to crypto stocks, was incredibly volatile this morning amid rumors that the large crypto exchange FTX was facing insolvency. Then, after a run on the exchange, FTX struck a deal to sell its non-U.S. operations to the crypto exchange Binance.
Shares of the large crypto exchange Coinbase (COIN 2.56%) traded as much as 12% lower as of 10:38 a.m. ET today before recouping much of those losses. As of noon ET, shares were down only about 1.8%.
The Bitcoin (BTC 1.43%) miner and business intelligence company MicroStrategy (MSTR 3.74%) also saw its shares trade as much as 17% lower today before cutting those losses in half. Shares of the Bitcoin miner Riot Blockchain (RIOT +1.73%) were down as much as 13% but also reversed most of those losses.
Image source: Getty Images.
So what
The trouble started when rumors on social media suggested that FTX has a large portion of its balance sheet tied up in its in-house cryptocurrency FTX (FTT +0.00%), which has raised liquidity concerns. These concerns have been buoyed by the fact that Alameda Research, a trading company tied to FTX, had a ton of FTT on its balance sheet as well.
Jeff Dorman, chief investment officer at digital asset investment firm Arca, explained that many are worried Alameda is using these FTT tokens as collateral, which could lead to two issues.
"If the price of FTT goes way down, then Alameda could face margin calls and all kinds of pressure; two is if FTX is the lender to Alameda then everyone's going to be in trouble," Dorman said in a CNBC article.
The situation got worse after Binance CEO Changpeng Zhao announced the company would be liquidating its large $2 billion position in FTT, due to concerns about FTX's balance sheet. The price of FTT is down more than 21.6% over the past 24 hours.
NASDAQ: COIN
Key Data Points
FTX founder and CEO Sam Bankman-Fried took to Twitter to say that "a competitor is trying to go after us with false rumors." He added that "FTX has enough to cover all client holdings. We don't invest client assets (even in treasuries). We have been processing all withdrawals, and will continue to be."
Still, the tweet did little to calm concerns and customers began to pull their money from the exchange, creating a liquidity crunch for FTX.
Then around 11 a.m. ET, Bankman-Fried announced that FTX would sell its non-U.S. operations to Binance in order to solve the liquidity crunch the company was facing due to requests for withdrawals. Binance will be doing due diligence on the company in the coming days. The price of Bitcoin immediately jumped $1,300 on the news.
"Our teams are working on clearing out the withdrawal backlog as is," Bankman-Fried said in a tweet following the deal. "This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we've asked Binance to come in. It may take a bit to settle etc. -- we apologize for that."
Now what
MicroStrategy and Riot are likely just moving with the price of Bitcoin today because both companies hold lots of Bitcoin tokens.
With Coinbase being a crypto exchange itself, its shareholders might have been concerned about seeing this happen to another exchange. But Coinbase still had more than $5 billion of cash and cash equivalents on its balance sheet at the end of the third quarter.
Ultimately, I still think Coinbase is a hold given that I think it will be relevant as long as crypto trading is. The crypto winter has been tough on the company, but I think it can survive and rebound long term. I'm far less interested in MicroStrategy and Riot and would prefer to just buy Bitcoin instead.
