🔪 How Rumours Killed A $32B Business (Binance x FTX)

This is The Level Ups. Modern business news for the future business leader (in plain-Jane English).

Today, we cover how a rumour spread on Twitter changed the crypto game. But the lessons apply to all of us.

Let’s get into it.

Estimated Reading Time: 3 minutes & 1 second.

Note: this is a simplified description because that’s our style. You’re welcome to read further details anytime through the links below or with your own research.

The Players:

Two companies: Binance and FTX. These two crypto exchanges had the wildest transaction in the game's history.

But this is about more than crypto. It teaches how volatile markets and vicious business moves can make or break multi-billion-dollar businesses.

Binance - the #1 crypto exchange in the world run by Changpeng Zhao

FTX - the #2 exchange run by Sam Bankman-Fried (SBF), aka “the fro of crypto”

This guy:

The third important player is FTT. This is FTX’s token. Their digital currency. Its value is derived from a volatile market that determines the said value (essentially) based on how strong FTX looks as a company in the eyes of the market.

People who owned FTT got perks on FTX. This is not about those perks.

Background:

Binance (#1), an early investor in FTX (#2), nurtured the second-best exchange until eventually getting bought out of their shares. #1 and #2 became “friendly” competitors.

At least that’s what it looked like.

As part of their deal, Binance was paid $2B in FTT. The digital currency on which FTX is based.

This is important for later.

You see, FTX’s massive value (nearly $32B) was partially based on the value of FTT. The made-up token’s value was a big part of the company’s value.

What happens when the digital currency's value drops? Company becomes worth much less. Then nobody’s happy.

That’s precisely what happened. FTT dropped by 78% in 24 hours and the company’s value dropped like a sack of bricks.

Why Such a Crash?

This is where it gets ugly.

It started with a rumour.

Changpeng Zhao posted this:

You know what happens when the CEO of Binance - who holds so much of the token - threatens to dump it? The price drops. That’s why we saw a crash.

What Happened Next?

This was Sam’s reply (the tweet was deleted but I got a screenshot):

Sure, “everything is fine” might work for some people. But these aren’t memes. We’re talking about billions of dollars. It wasn’t enough.

Enter Alameda, FTX’s parent company (with even more to lose). Their CEO said they would buy back the $2B in FTT that Changpeng threatened to sell.

The problem is they didn’t have the money to buy it, and it was clear.

Enter a crash. When FTT dropped, so did Bitcoin, and now everyone in the crypto game (pretty much) is losing money. There’s a lot of pressure, and it’s spiralling out of control.

Something has to be done to stop a collapse at this point. With everyone selling everything for whatever they could get, the value of FTX got crushed.

Now a big part of the community is at risk of losing it all.

The Wrap-Up:

So now we have a rumour that Binance will sell its FTT. The value of FTT drops. FTX and Alemeda are losing all their value and are on the verge of bankruptcy.

Changpeng now arranges a deal to buy FTX, which is on the verge of collapse anyway. This was a bailout.

This brilliant strategic move turned Twitter into a weapon and is borderline “dirty,” depending on who you ask. But that’s often how it works, especially in crypto.

Here’s how it wrapped up: Changpend (CZ, as he's often called online) as a saviour of a collapsing business. Binance buying FTX saved many crypto investors because they would have gone broke otherwise.

The Lessons:

If your value is derived from a digital currency, you’re at risk.

If you give away the thing that determines how valuable you are, you’re at risk.

If a rumour on Twitter can crush your business…you get the idea.

Now, crypto is volatile. We all know it, but this applies outside of crypto as well.

Protect what makes you valuable. People talk about being “transparent” and “building in public,” but be smart. FTX was in a tough spot (even after buying dozens of other businesses, arenas, and more) because they didn’t think this through.

Maybe it was too late for them, but it’s not for you.

As for the move itself. Call it dirty, but it’s also genius. It depends on how you choose to see it.

Want to see the man behind it? This is Changpeng Zhao. I guess the last lesson is don't let looks fool you.

What do you think?

Thanks for reading!

Darwin