Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Binance steps away from FTX – contagion is on the horizon
Mads Eberhardt
Cryptocurrency Analyst
Summary: Binance has decided not to acquire FTX upon due diligence of the firm. It seems plausible that FTX cannot satisfy its liabilities in terms of mainly customer deposits. This may lead to contagion and reduced liquidity across the crypto market.
Binance decided yesterday evening not to acquire troubled crypto exchange FTX upon due diligence of the firm, citing “… the issues are beyond our control or ability to help”. This follows after the two firms signed a letter of intent on Tuesday for Binance to acquire FTX, with the potential acquisition now scrubbed.
It now seems plausible that FTX has a serious hole in its balance sheet, effectively meaning it cannot fully satisfy its liabilities mainly with respect to customer deposits. This is possibly the reason for Binance stepping away from the potential acquisition of FTX. According to Bloomberg, FTX faces an up to $8bn shortfall. Bloomberg states that FTX may file for bankruptcy if the firm does not get a cash injection. This follows after FTX earlier this year allegedly transferred at least $4bn, including customer funds, to keep its highly linked trading firm Alameda Research afloat, according to Reuters. Please keep in mind that not much information is publicly available as of now, so the situation may change.
These events are altogether negative for the crypto market – and possibly other markets. It may lead to contagion throughout the crypto market, as not only FTX and Alameda may now be insolvent but other firms linked to FTX and Alameda as well. As previously one of the largest crypto market makers, it seems that Alameda has ceased much of its trading activities, ultimately decreasing the liquidity in the crypto market. Upon the enlarged uncertainty, various counterparts are likely to reduce risk across the crypto industry by e.g., reducing credit lines, which may reduce the liquidity further. We expect the increased volatility in the past couple of days to continue in the foreseeable future, as the market simply does not know what to expect, so please act cautiously.
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