Why Bitcoin Plummeted When a Binance-FTX Deal Collapsed
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Here's your money briefing for Thursday, November 10th. I'm J.R. Whelan for The Wall Street Journal. It's been a wild week in the world of cryptocurrency. First, crypto exchange Binance indicated it would acquire rival FTX, which surprised a lot of folks in the crypto sector. Then a day later, it pulled out of the deal, citing FTX's troubled finances. And along the way, investors in Bitcoin and other cryptos saw the balance in their digital wallets plummet.
There is this phrase in the crypto industry called not your keys, not your money. So if you place your cryptocurrencies, your Bitcoin on a crypto exchange, you sort of have to consider the risk that you might not be able to get it back.
So why has the drama around FTX affected the price of Bitcoin so much? And should crypto investors be bracing for more instability? Our reporter Vicky Huang will join us with some answers after the break.
Bitcoin has lost more than half its value this year, but investors saw its price drop 13% in one day on Tuesday when cryptocurrency exchange Binance announced plans to acquire rival FTX and then fell another 14% yesterday when Binance called off the deal. So what's going on? Vicky Huang is part of the WSJ team that's covered this story every step of the way, and she joins us to connect the dots. Vicky, thank you very much for being here.
Thank you for having me, JR.
So Vicky, this involves cryptocurrency exchanges. Can you just help us understand how these exchanges work and the role they play in the whole crypto ecosystem?
Cryptocurrency exchanges play a very big role in the crypto ecosystem because they are the venues where traders or investors go to buy or sell their cryptocurrencies. So for example, if you as an investor want to buy Bitcoin, In the US, you will probably go to an exchange like Coinbase. You will place an order and that's how you know you would have your Bitcoin holdings. It's similar to if you open your Robinhood app and you place an order for shares of any stock you would like to buy.
What happened when Binance first announced a potential acquisition of FTX?
It's sort of a similar process where if you were to go to a crypto exchange, whether it's Coinbase or Binance or Kraken, You would usually open up an app on your phone and then you would place an order. And that's how you would be placing an order for cryptocurrencies that you want to purchase.
Now, this was a pretty fast moving story. So on Tuesday, Binance announced it had signed a non-binding letter of intent to acquire FTX. Why did that take the crypto industry by surprise?
because FTX has always been seen as one of the fastest growing and healthy financial crypto exchanges. The cryptocurrency market has had a few months of market carnage since the summer. But FTX has actually been one of the players that has survived through the market carnage. So that gives the sort of impression that FTX is in very good financial health. So this deal sort of showed that it is actually not in good financial health and could potentially be insolvent. That's why it needed a bailout from Binance, the world's largest cryptocurrency exchange. So that's why it really took the crypto industry by storm.
So why did Bitcoin drop 13% and other currencies drop as well after Binance's announcement?
One interpretation is that the market is not confident that Binance is going to close the deal. It only signed a non-binding letter of intent. So the crypto market is sort of thinking about what could happen if this deal doesn't close, because FTX itself is a pretty big cryptocurrency exchange.
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