FTX and Binance plan to merge in order to prevent a market collapse

• Financial

Crypto giant Binance has signed an agreement to buy FTX to cover the “liquidity crisis” in the cryptocurrency exchange. The sudden move has raised new concerns about the risks investors face in the volatile crypto market.

This is a rather stunning outcome that follows speculation that FTX and sister firm Alameda Research are facing a liquidity crisis. At the beginning of this year, FTX was valued at $32 billion, and Binance is the largest crypto exchange by volume.

Financial terms of the transaction were not disclosed, but it is understood that FTX's US division, a separate entity known as FTX US, is not involved in this deal. Binance CEO Changpeng Zhao said in a tweet that FTX, led by billionaire Sam Bankman-Fried, asked for their help after a “significant liquidity crisis”.

“We hired a lot less than most places did but we’ve also kind of kept our costs under control,” Bankman-Fried said.

A liquidity crisis haunts the crypto market

The liquidity crisis at FTX, which has been buying up troubled crypto platforms in 2022, hints at a potential larger selloff of cryptocurrencies.

The crypto market experienced a severe sell-off. Bitcoin also rallied after coming under pressure before falling to a new two-year low of $17,300. At the time of writing, the price of Bitcoin is $17,973. Smaller crypto assets linked to Alameda, a company owned by Sam Bankman-Fried, suffered bigger losses.

FTX Token (FTT), the native token of the FTX trading platform, has sunk by as much as 76.5%. The token is tied to Ethereum competitor Solana, whose big backer is Alameda, lost 28.4%. “The Alameda hedge fund is tied to FTX through a ton of FTT tokens and the rumors started that if they are using all of these FTT tokens as collateral…there are two issues,” said Jeff Dorman, chief investment officer at Arca.

“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”. “What could have been just an isolated issue at Alameda became a bank run,” he added.

“Everybody started to pull their assets out of FTX and there’s this fear that FTX would be insolvent”.