Social media is going crazy as market giants are battling! Decentralized video platform LBRY lost an important legal battle with the SEC. Coinbase’s Q3 figures are not pretty to look at. Fed boss Jerome Powell dashed investors’ hopes for a rate cut.
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FTX vs. Binance war rages
Today’s biggest topic is definitely the war between FTX and Binance. Specifically, there is a battle between the founders of the companies, Sam Bankman-Fried (FTX) and Changpeng Zhao (Binance).
Many people may not know that Binance was one of the biggest supporters and investors in FTX. When FTX started to threaten Binance by growing too fast, relations cooled and FTX bought Binance out in 2021. This deal gave Binance stablecoins and a big pile of FTT tokens. FTT is the FTX exchange’s own token.
The FTT token became a hot topic last week after the Coindesk news. It reported that Alameda Research has an alarmingly high proportion of FTT tokens on its balance sheet. Alameda Research is a trading firm founded by Sam Bankman-Fried. It acts as a market maker, among other things, and naturally has close links with the FTX exchange.
This started a rumor mill that Alameda Research would be in big trouble if the FTT collapsed. This could also lead to problems with the FTX. Alameda’s FTT holdings are worth several billion, so there is virtually no way the company could dump them on the market in the absence of liquidity.
Binance’s founder Changpeng Zhao sensed an opportunity to strike and made a move. He tweeted on Sunday that Binance plans to dump more than $500 million worth of FTT tokens into the market. And that’s not all. CZ said the decision was a risk management operation and deliberately mentioned Terra Luna.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.
— CZ 🔶 Binance (@cz_binance) November 6, 2022
The announcement by the Binance boss had the expected effect. Yesterday (Monday), many well-known influencers started urging FTX clients to withdraw their assets from the exchange. This has led to a “bank run” from FTX.
Why did CZ make such an attack? The answer to this question is in the tweet above. CZ believes that Sam Bankman-Fried is throwing a spanner in the works of Binance by using regulation as a weapon. SBF was the second largest contributor to Joe Biden’s presidential campaign. He has also given lots of money in Washington in the direction of many different politicians.
So, it’s a real Game of Thrones at the top of the crypto industry. Two of the most influential people and exchanges in the sector are pitted against each other. Unfortunately, all investors are currently the victims of this war. The battle has rattled the market and caused prices to fall.
The cryptocurrencies that have suffered the most are FTT and Solana. At the time of writing, the FTT token has collapsed by around 20% from last night’s level. The whole market is currently watching to see if FTX & Alameda can support the FTT token. Its collapse could lead to the liquidation of Alameda’s loans backed by the FTT token.
FTT down nearly 9% over the last hour
— Frank Chaparro (@fintechfrank) November 8, 2022
Solana is thought to have collapsed because FTX and/or Alameda have sold SOL tokens to finance FTT’s subsidy purchases. FTX is one of Solana’s biggest backers.
The situation is constantly evolving and there is no clear end in sight for this war. However, we would like to underline that so far the rumors of liquidity problems for Alameda and FTX are only rumors. FTX has processed all withdrawals and there has been no news from the market regarding Alameda. This is the situation at the time of writing.
Many people have panicked and emptied their FTX accounts because there have been so many similar examples in 2022. For example, the lending service Celsius crashed because it did not have the liquid funds to pay out all the withdrawals. If the exchange has to close its doors, even for a little while, customer confidence will be gone.
Any platform can run into problems with simultaneous withdrawals, even if it has sufficient assets. If too many assets are locked up in illiquid investments, the release of funds can take too long and cause insolvency.
An update at 18:00 CET.
The FTX vs Binance war is officially over! It ended with a knockout victory for Binance in two days. Today’s bank run drove FTX into a liquidity crisis from which it could not recover. SBF had to call in Binance to save the day. As a result, Binance buys FTX. We will report on this in more detail in next week’s news review.
LBRY loses legal battle with SEC
There was bad news from the US yesterday. The decentralized video platform LBRY lost its legal battle against the SEC, the US Securities and Exchange Commission. The decision could have far-reaching implications for the crypto sector as a whole, and in particular for the XRP vs SEC battle that we all know.
LBRY is a protocol that is relatively unknown to the general public. It has built a decentralized version of YouTube. LBRY content can be viewed via the odysee.com interface or you can install Windows software for viewing.
The idea behind LBRY is to create a censorship-resistant solution for content providers. YouTube can close anyone’s account, but Web3 offers a different option. The problem with LBRY (and other similar services) is the lack of network effect. Video viewers (and advertising revenue) are not easy to move away from YouTube, so content providers are not easily attracted.
The news announced yesterday relates to a legal battle that has been going on since March 2021. At that time, the SEC sued LBRY in a legal battle because it considered the LBC token created by LBRY to be a security. Unfortunately for the entire crypto industry, the SEC won.
LBRY has lost in court against the @SECGov.
“The SEC vs. @LBRYcom case establishes a precedent that threatens the entire US cryptocurrency industry.
Under the SEC vs LBRY standard, almost every cryptocurrency, including Ethereum and https://t.co/Gg74SjHlJm
— Eleanor Terrett (@EleanorTerrett) November 7, 2022
Why can the case have wider implications? The SEC boss Gary Gensler has so far given a signal that tokens created through an ICO are classified as securities. However, the LBC token was not created through an ICO, so yesterday’s decision opens the door for the SEC to chase basically any cryptocurrency.
Why is the SEC in cryptocurrencies at all? Because equities and other instruments in the US are classified as securities and subject to securities laws. They can only be offered on exchanges that meet certain regulations.
Cryptocurrencies have not yet been classified as securities, so crypto exchanges operate under completely different rules. If a cryptocurrency is given the status of security, it is effectively banned in the United States, the world’s largest market.
The LBRY, like others, has argued that the SEC itself has not published clear rules of the game for the industry. The SEC is targeting decisions made years ago, even though there weren’t (and still aren’t) clear guidelines on how to legally create a cryptocurrency in the US. However, even this argument did not help in court.
Time will tell what impact the LBRY vs SEC case will have on the sector as a whole. It is by no means a good thing. LBRY’s LBC token fell about 35% yesterday after the news. Its price is now as much as 99.5% below the ATH.
Coinbase published Q3 results
The US-based Coinbase is so far the only cryptocurrency exchange that is also listed in the US on the “traditional exchange” side. Coinbase has been listed on Nasdaq since the spring of 2021. As a publicly traded company, it is also required to publish quarterly earnings reports.
Coinbase’s Q3-2022 figures were reported last week, so let’s go through them next. First, let’s start with the key figures that describe the company’s performance.
Coinbase’s revenue side has continued its steep decline. Net revenue fell by tens of percent from Q2, which was already very weak. Compared to a year ago, more than 50% less money has come in. The company also made drastic losses. The only positive thing is that the losses were at least halved from the last quarter.
Coinbase, like many tech companies, is facing a drastic cost cut in 2022.
Not surprisingly, Coinbase blames the poor performance on the challenging macroeconomic situation, inflation, and the collapse of the crypto market. These factors have caused major revenue losses for every company in the industry. Last week, for example, we reported on the bankruptcies of Bitcoin mining farms.
Despite the losses, the company’s financial situation is stable, with more than five billion dollars still in its coffers. The poor quarterly results do not therefore in any way undermine Coinbase’s security for users.
Let’s then look at the trading volume.
The volume of retail trading has plummeted by almost 50% since the previous quarter. The markets are really quiet right now – not just at Coinbase. Institutional volumes are also down by more than 20%.
In the bear market, speculation is more focused on the largest and “safest” cryptocurrencies. Bitcoin and Ethereum have been increasing their share of the trading volume throughout 2022. Interestingly, Ethereum’s trading volume overtook Bitcoin’s for the first time in Q3!
Coinbase’s share price has closely followed the development of the entire crypto market. Coinbase, which trades with the ticker COIN, is currently down more than 80% from its ATH price.
Jerome Powell offered no relief to investors
The biggest topic of last week was definitely the FOMC meeting. This is a monthly event where the heads of the US Federal Reserve (Fed) meet. After the meeting, Fed chairman Jerome Powell holds a press conference and answers questions from reporters. You can watch Powell’s press conference on YouTube.
As we have been writing throughout 2022, the Fed’s rate hikes and monetary tightening have crashed equity and crypto markets. In recent months, the question has been asked: when will this trend come to an end? Investors were feverishly waiting for better news a week ago. Is the Fed starting to get close to a cap on interest rates?
As expected, the Fed raised its policy rate by 0.75 percentage points and provided investors with a rather positive press release. This initially sent stock prices green. However, the party came to an end when Jerome Powell started talking. Powell shot down all investor hopes of interest rate cuts in the near future.
It is VERY premature to think about or talk about pausing our rate hikes.
Fed pivot what?
— Alf (@MacroAlf) November 2, 2022
To top it all off, the Fed boss issued a statement saying that even too tight a policy does not scare the US central bank! According to Powell, it is better to tighten too much (and crash the market) than too little. The Fed does not want to make the mistake of letting inflation get entrenched and spike up again later.
Therefore Powell is going to drive down inflation – no matter the coste. At stake is the credibility of the Fed after the mistakes of recent years. To sum up:
- The Fed plans to continue raising the policy rate from its current level.
- Interest rates will rise higher than previously thought within the Fed.
- The Fed would rather tighten too much than too little.
This means that we will probably have to wait for a more positive market until well into the spring of 2023. Powell’s actions can only be curbed by political pressure, problems in financial markets, a sharp rise in unemployment, or similar. Otherwise, the Fed will continue to grind markets down in the months ahead.