On October 8, Binance CEO Changpeng Zhao (also known as CZ) announced his intent to acquire FTX, and exchange founded by Sam Bankman-Fried (also known as SBF). In other words, world’s biggest crypto exchange will be buying world’s second-biggest crypto exchange.

How did yesterday’s rivals end up striking a deal? The whole story is worthy of a movie: a young prodigy who raised in big money and dabbled with politics, his more experienced counterpart with a massive empire, a leaked balance sheet and the ensuing public scourge… all to culminate in a surprising announcement and a happy ending.

Here’s what happened.

FTX’ spectacular rise

SBF used to be the crypto industry’s darling.

A young MIT graduate founded a quantitative trading firm Alameda Research in 2017, and a crypto exchange FTX two years later, securing $1.7 billion from a bunch of renown investors, including Binance. The latter has exited from FTX equity earlier this year with $2.1 billion in BUSD (Binance’s stablecoin) and FTT, the token of FTX exchange.

FTX was developing fast, attracting 1.2 million users with its landmark media campaigns (like the acquisition of naming rights to Miami’s NBA venue) and via its numerous acquisitions (Blockfolio, LedgerX, Japanese exchange Liquid…) Most recently, FTX provided a $400 million line of credit to BlockFi and bought almost all the assets of the bankrupt Voyager Digital, both having suffered from Terra’s collapse.

FTX participated in many of the recent fundraisers, including Sui and Aptos, the blockchain developed by former Meta engineers.

With money often comes interest in politics, and SBF has become a keen political donor, financing Biden’s 2020 campaign and spending around $50 million on 2022 midterms (for both political parties, but mostly democrats). He also created controversy by supporting the Digital Commodities Consumer Protection Act (DCCPA), which crypto media has dubbed a “DeFi-killer”. After a massive outrage created by his regulation proposal, he changed his wording, but given his political affinities, the crypto industry kept its suspicions.

FTX’ rapid fall

All seemed to go fairly well, until on November 3, Coindesk published a scoop on Alameda Research. Quoting a leaked balance sheet, crypto industry’s notorious media noted that out of $14.6 billion of Alameda’s assets, $3.6 bn were $FTT (FTX token), $2.16 bn – $FTT collateral, $1.15 bn of $SOL and $2.2 bn more of crypto, including some illiquid tokens.

The article highlighted the closer-than-expected relationship between FTX and Alameda and raised concern about a third of Alameda’s equity being composed of FTX tokens “created out of thin air”.

The markets did not react much, but users started withdrawing their funds from FTX.

Then on Sunday, November 6, CZ announced that he would liquidate the $FTT remaining on Binance’s books “due to recent revelations that have come to light”. He added that this liquidation was “post-exit risk management, learning from LUNA”.

Technically, $FTT has nothing to do with $LUNA, but a giant such as CZ mentioning two coins in one tweet stirred the markets. Manageable funds withdrawals turned into a bank run: Reuters reported roughly $6 billion of net withdrawals in 72 prior to Tuesday. FTT dropped from $22 to $16 and Bitcoin lost 6%, as crypto Twitter was wondering if Alameda were to repeat the fate of Celsius, which was also accused of having rigged its balance sheet through the manipulation of its token CEL.

Many were wondering why CZ chose such indelicate wording, others – why he did not accept Alameda’s CEO proposal to buy Binance’s $FTT at $22. Some even spoke of a personal feud, as CZ mentioned that “we won't support people who lobby against other industry players behind their backs”.

Binance to the rescue

The reality appeared to be more interesting.

Yesterday evening, CZ announced that Binance would be buying FTX to “help cover liquidity crunch”.

Crypto markets went crazy: $FTT dropped to $4.6, losing 80%, and Bitcoin, reflecting the overall market confusion, first gained almost 8%, and then lost 18%, crashing to as low as $16’900 at one point.

Crypto industry was once again reminded about the importance of a quality collateral. As CZ put it in his latest tweet:

“1. Never use a token you created as collateral. 2.Don't use capital "efficiently". Have a large reserve.”

The advice seems all the more valuable if Binance itself follows it. CZ’s empire is estimated at $300 billion now, and it might be adding FTX’s $32 billion valuation soon.

Written by D.Center