Binance’s recent announcement that it plans to acquire crypto exchange FTX has sent the prices of many cryptocurrencies on a downward spiral. According to CoinMarketCap’s latest report, the global value of the entire cryptocurrency industry dropped by 12%, settling at $911 billion.

Following Binance’s announcement on Tuesday, November 8th, its own BNB token practically lost all its gains, plunging by 9% and slipping into negative territory. Likewise, the value of FTX’s own proprietary token plunged by around 84%.

Other cryptocurrencies also registered losses, including front-runner Bitcoin. The biggest token in terms of market capitalization registered a 12% loss, while Ethereum’s ether dropped by 17.5%. Novelty/meme coin Dogecoin posted one of the heaviest losses, plunging by around 25%.

Much of the negative impact was due to the way the impending buy-out raised fears regarding liquidity throughout the industry. 

Covering the Crunch

Binance CEO Changpeng Zhao recently posted on Twitter that his company signed a non-binding letter of intent (LOI) stating that it aims to cover any liquidity issues as it is gunning for a full acquisition of FTX.

However, this does not mean that the deal is final. Zhao explained that the deal remains in abeyance as his company is still set to conduct due diligence regarding the exchange, as well as the conditions regarding the purchase.

For his part, FTX founder and CEO Sam Bankman-Fried also posted on Twitter, stating that his team is working with Binance to clear out the current withdrawal background. In doing so, they hope to clear out any liquidity issues and cover all assets 1:1. Bankman-Fried added that this clearing activity was one of the reasons why FTX got Binance involved.

Working Away from the Sting of a Crypto Winter

One of the primary issues surrounding the announced deal is liquidity. FTX’s liquidity came into question earlier this week and the value of its token went into a steep and rapid decline.

According to a report from crypto-centric news site CoinDesk, the balance sheet of FTX’s Alameda Research heavily relied on FTT. This drove speculation that the company relied on illiquid digital assets rather than hard cash or other liquid assets.

Many analysts and industry watchers opine that FTX has yet to recover from the crypto winter, which occurred towards the end of 2021 when nearly $2 trillion of the cryptocurrency sector’s market value was wiped out. Indeed, the crypto exchange’s liquidity woes occurred in the spring of 2022 following the implosion of UST, Terra’s stablecoin, which fueled numerous token crashes throughout the sector.