Roiling The Market Bit by Bit

Roiling The Market Bit by Bit

By Philip Dudley

Great Britain’s King Charles is not the only new king on the planet.

Changpeng Zhao, or CZ as he is commonly known, has emerged as a potential royal monarch of finance in a seemingly continuous cycle of turmoil in the world of cryptocurrency.

Philip Dudley

CZ is the co-founder and CEO of Binance, the world’s largest crypto exchange by trading volume. He’s managed to throw the third largest crypto exchange, FTX and its cofounder and CEO Sam Bankman-Fried (SBF), into free fall.

Binance recently announced it was backing out of its plan to save FTX, less than 30 hours after announcing its intent to acquire it.

Don’t let all these acronyms get you down. Let me explain CZ vs. SBF.

The use of leverage with a volatile asset is a killer, even more so when you have a run on the bank.

That’s the situation FTX found itself in. CZ and SBF have been sparring for months on online media channels.

Then a news story broke revealing the relationship between SBF’s hedge fund Alameda and FTX.

Alameda’s roots are in cryptocurrency arbitrage, but it turned to market making with quantitative trading strategies. Alameda in the beginning was FTX's first market maker because FTX needed the liquidity in the early days as an exchange.

This nepotism relationship has apparently been an issue (as it should) for many years. But it didn’t stop white-glove venture/ private equity firms and celebrities from pouring money into FTX as they raised institutional capital as recently as 2021.

It appears that FTX prioritized Alameda’s order flow in front of other traders and skimmed fractions of basis points. This may not seem like a big deal, but when you’re the third largest crypto exchange in the world, it definitely adds up.

To make matters even more extreme, almost half of Alameda’s capital was in FTX’s exchange token $FTT and Solana ecosystem tokens. If there was ever a need to sell $FTT token to raise capital, it would be very difficult because they controlled two to three times the supply that circulated.

Enter CZ and Binance. He went public on Twitter that the company intended to sell all of its $FTT holdings ($500 million-plus) due to “recent revelations.”

This was CZ’s chance to sink SBF, and the run on the bank began in earnest with customers withdrawing billions from FTX in a matter of days.

What did our newly crowned King CZ know? It doesn’t really matter. What’s clear is the relationship between Alameda and FTX was doomed from the start and a larger competitor simply started the process of taking the house down with a single tweet.

So it goes in the world of crypto, and long live the King. For now, anyway.