Source: PaxForex Premium Analytics Portal, Fundamental Insight
In a fast-paced development that seems to be changing by the hour, major cryptocurrency exchange Binance said it would no longer pursue an acquisition of FTX, the world's fifth-largest cryptocurrency exchange by volume over the past year.
The price of the world's largest cryptocurrency, bitcoin, rose sharply on news that Binance plans to buy out FTX. But the news that Binance was backing out of the deal caused bitcoin to collapse, with its price dropping more than 15% at one point.
The FTX collapse undoubtedly shook the entire crypto industry and shook investor confidence, but is the market overreacting? Should investors buy bitcoin in a downturn? Let's break it down.
In case you missed the drama, earlier this month CoinDesk published a scathing report stating that FTX's trading subsidiary, Alameda Research, both owned by Sam Bankman-Fried, was "padding" its balance sheet with billions of dollars worth of FTX proprietary tokens called FTT, instead of having sufficient balances in fiat currency assets or tokens from unlinked cryptocurrencies.
This raised all sorts of questions, such as whether Alameda used FTT (which FTX potentially can "produce" out of thin air) as collateral and how much exposure FTX had to Alameda and FTT. Investors became concerned that if the price of FTT declined enough, FTX might have solvency problems. While Bunkman-Fried did his best to dispel those rumors, and Alameda CEO Caroline Allison added that the company has $10 billion in assets that were not mentioned in the CoinDesk report, it did little to alleviate investor fears.
Binance CEO Changpeng Zhao first said he planned to liquidate the $2 billion FTTs he owned. Then customers began withdrawing their funds, and FTX received $6 billion in withdrawal requests in 72 hours, leading to a liquidity shortage.
It was then that Bankman-Fried announced that he would sell FTX's operations outside the U.S. to Binance to alleviate the liquidity crisis until due diligence could be performed. However, Binance did not immediately realize that acquiring FTX would be too onerous, and the company backed out of the deal.
It should be noted that cryptocurrency is volatile even on a good day, so major collapses of companies that are at the center and play an important role in the crypto ecosystem are not good for an industry that is still relatively new. As a pioneer of cryptocurrency and blockchain technology, it's not surprising to see bitcoin struggle in the news.
A big part of the cryptocurrency investment thesis is that digital currencies will become ubiquitous, so it's obviously a blow when one of the largest crypto exchanges, which serves as the main source of liquidity for conventional crypto investors, is experiencing liquidity shortages.
Bankman-Fried was considered a leader in the cryptocurrency community, and FTX has made a number of major sponsorship deals with sports teams, so the fact that the exchange could go out of business in a few days cannot help but worry the market. In addition, the incident has hit the promising altcoin Solana, which is backed by Alameda Research, which may have to liquidate its holdings of the token.
Such events are also an open call for regulators. Zhao himself said that potential investigations by regulators are one of the reasons Binance decided not to participate in the deal. He added that the event could lead to increased regulatory scrutiny and ultimately make it more difficult for new cryptocurrency exchanges to obtain licenses.
The market is unlikely to overreact because we have already seen big falls in the cryptocurrency market when other similar events occurred, including the bankruptcy of Celsius and Voyager, as well as the collapse of the algorithmic stablecoin terraUSD.
But at the same time, this cannot be said to change the broader thesis of bitcoin. After all, FTX's fall appears to be due to liquidity problems and perhaps unpleasant rumors started by competitors. While this may reduce investor sentiment and cryptocurrency liquidity in the short term, there are many other exchanges that crypto investors can use to buy and sell cryptocurrencies. Therefore, it is unlikely that this could lead to the cessation of cryptocurrency trading in the long term.
The cryptocurrency market will eventually stabilize and we will emerge from this mess with tighter regulation, which is not always a bad thing. Many people still believe in a bright future for bitcoin in the long term and think it is a good buying opportunity, as long as you realize that things may be volatile in the short term.
As long as the price is below 18000.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 17182.00
- Take Profit 1: 15000.00
- Take Profit 2: 13000.00
Alternative scenario:
If the 18000.00 level is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 18000.00
- Take Profit 1: 25200.00
- Take Profit 2: 29000.00
