08 Nov 2022

Binance vs. FTX: Clash of the Titans

Friction between the two most influential crypto exchanges has escalated throughout 2022. It has reached hostile levels in the last couple of days following the release of a Coindesk article related to Alameda Research’s assets and liabilities.
Source: Tradingview
FTX and Binance in a big public corporate war
Friction between the two most influential crypto exchanges has escalated throughout 2022. It has reached hostile levels in the last couple of days following the release of a Coindesk article related to Alameda Research’s (FTX subsidiary) assets and liabilities. We elaborate on necessary details in the context section below. The key takeaway from the entire ordeal is that FTX is facing an ongoing bank run caused by Binance and its CEO, Changpeng Zhao (CZ), actively selling FTT and racing concerns related to the financial health of FTX. CZ of Binance has compared FTT to Luna, questioned FTX’s reserves and Alameda’s ability to fund an OTC purchase of FTT, while Alameda Research’s CEO Caroline Ellison attempted to purchase all Binance FTT for $22 in an OTC deal. While Alameda’s substantial exposure to illiquid altcoins and the ownership concentration of FTT are alarming, the LUNA comparison is quite the stretch. In sum, it has contributed to headwinds in FTT, SOL, and other FTX-exposed tokens, in addition to spanning a new wave of fear in the market. We view the risks of an FTX insolvency as exaggerated but view this as a very plausible source of prolonged adverse reputation effects hitting FTX, halting their ability to secure further growth onwards.
What’s our take on the situation?
Risks of insolvency are minimal, and comparisons between FTT, FTX and Alameda and the LUNA/UST mechanism are fundamentally wrong, as the structure of FTX is utterly different from the demand dependency of LUNA/UST. However, a rational response to the uncertainty is to avoid having all funds concentrated at one exchange and to act cautiously. Insolvency is an improbable outcome. Nevertheless, we view this situation as a contributor to a long-term severe negative reputational impact for FTX. We’re already witnessing massive outflows from FTX, suggesting a current run on the exchange. Remember how BitMEX never reclaimed its dominance after the 2020 headwinds?
Open Interest
Source: Laevitas
What’s the relevancy for the market? With the Luna, Celsius, and 3AC contagion collapse fresh in mind, it’s clear that an FTX insolvency would reflect very badly on the market. The current fear, in isolation, may cause selling pressure related to protection in bitcoin, ether, and other digital assets. Markets would be destined to go south if an actual insolvency occur. Why now?
  1. Sam Bankman-Fried’s public backlash related to his thoughts on crypto regulation.
  2. The short squeeze in late October led to further pressure as murmuring about unfair liquidation mechanisms at FTX erupted. We remind our readers that Binance’s public liquidation data have been underreported since April 2021.
  3. Last week, Coindesk shared a report showing that Alameda Research’s balance sheet as of June 30 was heavily concentrated in FTT and illiquid altcoins. Caroline responded that Alameda has more than $10bn of assets not reflected in the report.
  4. Good timing. The market is in a flat and boring environment. Binance has already reaped the benefits of removing trading fees, seeing a growing market share in the spot market. Now is a perfect time to further consolidate market dominance by pressuring FTX and the general publics’ trust in FTX’s financial well-being.
FTT plunges while leverage doubles overnight FTT has fallen from $26 to lows of $15 over the last seven days, experiencing an initial push south following Coindesk’s article. FTT has experienced massive news-driven volatility driven by
  1. Binance’s FTT holdings being on the move,
  2. Caroline’s suggested OTC purchase at $22, and
  3. CZ’s response by elaborating on how the selling process would likely take months, making comparisons between FTT and Luna. FTT stabilized at $22 after the Caroline statement, but the price level was shattered overnight as FTT plunged to lows not seen since Feb 2021.
Source: Laevitas
Speculative interest in FTT has exploded amid the drama. Open interest relative to market cap sits at 7.65% compared to 2.8% last week. The growing open interest has been accompanied by massively negative funding rates at Binance and Bybit, suggesting a substantial demand for shorting FTT. FTT seems rigged for volatile squeezes onwards, and Alameda Research and FTX is likely to experience a massive setback following these tumultuous days.
Source: Dune. Based on known Ethereum, Polygon, Optimism, Arbitrum, BSC and Avalanche wallets
What is FTT?FTT is FTX’s exchange token. Token holders are rewarded through fee rebates when trading. FTX also burns token supply based on trading volume. FTT investors are exposed to FTX’s trading activity via the burning process, creating a secondary demand to hold FTT. Why does Binance hold FTT? Binance invested in FTX in 2019. In 2021, Binance exited its FTX investment and was compensated with $2.1bn in BUSD and FTT. The percentage share of the FTT compensation is unknown. Binance to sell FTT On Sunday, CZ publicly announced Binance’s intention to sell its FTT stake, aiming to do it in a way that minimizes market impact. Caroline Ellison of Alameda Research publicly proposed an OTC purchase at $22.This article is a part of the deep-dive section of our new market report: Ahead of the curve

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