Digital assets were posting heavy losses in early trading Tuesday on speculation of FTX cryptocurrency exchange insolvency. Rumors intensified this morning following reports that Sam Bankman-Fried’s company has stopped processing withdrawals on the blockchain due to its rapidly weakening balance sheet.
Nothing was verified prior to 11:00 am ET, but panic selling quickly escalated in the space, sending Bitcoin and Ethereum down more than 6% and 9% respectively. Crypto-related stocks also took a heavy hit, with Coinbase Global (COIN) plunging 12% and MicroStrategy (MSTR) down about 17% at some point before noon.
Sentiment is not likely to improve until FTX’s liquidity concerns are addressed and dismissed, but if rumors proved to be true, the sell-off could worsen amid broadening industry’s instability fears, at a time when the Fed’s aggressive tightening cycle continues to dampen risk appetite.
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The situation took an unexpected turn after Bankman-Fried revealed via Twitter that he has reached an agreement on a strategic transaction with Binance to sell FTX. Terms have not been disclosed, but the announcement certainly sounds like a last-minute bailout amid a liquidity crunch.
Binance will absorb all FTX-related liabilities, but the larger exchange must be confident that it can plug the hole, otherwise it would not have come to the rescue of the competition. In any case, the industry’s consolidation seems to be welcomed by the market, as cryptocurrencies have come full circle, erasing most of the session’s losses.
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—Written by Diego Colman, Market Strategist for DailyFX