FTX could cause Contagion 2.0
Never a dull day in crypto. At the time of writing this, news broke out a couple of hours ago that Binance has signed a non-binding LOI to purchase FTX. The deal reportedly concerns the non-US entity of FTX, which is the majority of the entity. The shock announcement comes after a public feud/twitter battle between SBF and CZ. For the past months, rumors were swirling around a possible insolvency or lack of on-hand liquid capital at Alameda Research and FTX. Both the FTT and BNB tokens have been all over the place today. This marks one of the biggest shockwaves in crypto and has the potential to have a strong ripple effect across the industry…again…as if the Terra collapse and the subsequent CeFi contagion weren’t enough for one year…
How did we get here? A short recap
SBF’s projects have been somewhat rumored to have poor financials for a while. However, there hasn’t been anything concrete. That is until a report from Coindesk dated November 2nd shed some light on Alameda Research’s financials after having obtained a copy of its Q2 balance sheet. Also shoutout to Dirty Bubble Media for an awesome breakdown of the docs. According to the documents, Alameda had a total of $14.6 billion, of which: $5.8 billion was comprised of FTT token, $1.2 billion SOL, $3.37 billion in undisclosed cryptos, $2 billion in equity investments and $2.2 billion in other SBF-related projects such as SRM, OXY, MAPS and FIDA.
In total, there were $8 billion of liabilities, of which $7.4 billion were loans and just under $300 million of FTT token. Coindesk could not identify the rest. As of June 2022, Alameda only had $134 million in cash on hand. The leak shows that the firm’s largest asset is FTT, issued of course by FTX and comprising roughly ⅓ of the total assets and represented around 88% of Alameda’s net equity. Effectively, the firm’s largest asset is a token issued by a sister company (FTX), which in turn was “backed” by tokens issued by the same parties. A collateralized loop that showed investors what they wanted to see: growth. Even though it was literally made from thin air.
All of these poor finances, SBF’s exposure to Celsius and 3 Arrows Capital and of course, the overall bearish market sentiment, have put FTX under a lot of pressure. And then came along the debacle with Binance. I won’t be going in depth about it, because I think the overall impending market risk we are under is of far more urgency than how we got to this point. Here is a great explanation of the timeline of events leading up to the acquisition of FTX. However, the TL;DR is that Binance has started liquidating some $584 million worth of FTT a short while ago in a move to exit its initial investor position in FTX from 2019. Needless to say, this has put a lot of pressure on the already battered token. Now, what does this mean for the market?
What other projects have strong exposure to FTX?
Super awesome research done by Lookonchain shows us that of the 56 largest Alameda addresses, USDC, FTT and WBTC are the three largest holdings. There are also roughly $4 million worth of LDO. With FTX and Alameda scouring for liquidity, there are already reports about big dumps from these positions.
On FTX’s side, its largest recent holdings are roughly $1B worth of FTT, $80 million USDT, $59 million PAXG and $52 million stETH. Doesn’t take a rocket scientist to see how tight one of the (former) largest exchanges was with the overall market, through its largest stablecoins, ETH and BTC.
However, what is arguably THE horror story around most crypto Discord channels right now is the >$1.2 billion worth of SOL. that FTX has. Well, as it appears, a famous whale that you might remember from back in June, still has $60 million up for liquidation at a price of roughly $21 per SOL. Since FTT might continue liquidating its other holdings in order to prop up more cash, that could send the price of SOL down under that level, triggering the whale to be liquidated and thus putting even more sell pressure on the token.
But wait, there’s more. Abracadabra’s MIM depegged as low as $0.80 before “recovering” at around $0.97 as FTT was tanking. This is the lowest level it has ever reached, eclipsing even the depeg it had during the Terra collapse. Even though now it appears as though the amount of FTT backing MIM has fallen to under $80k, it was its biggest collateral, accounting for 33% of the total backing locked in “cauldrons” as per Abracadabra.money analytics.
What happens next?
Contagion 2.0? Is it really a new contagion, or is it just the continuation of the previous one? Crypto is a small world and everything spills into everything else. The previous CeFi episode of the contagion was only made worse by the fact that everybody was borrowing from everybody and lending to everybody, thus creating leverage on the basis of money which never existed. Back then FTX was swooping in to buy many battered crypto lenders. Now, FTX is being bought for, let’s be honest, pennies on the dollar. There appears to be a trend of overall consolidation in the space and I am sure this is not the last acquisition/hostile take over we will see in crypto in the next year. What is definitely sure, is that Binance was in a massively powerful position last week and it will grow by a lot now that it cannibalized one of its largest competitors. Never a dull day in crypto.