Why Bitcoin and Ethereum Prices Are Plunging After Binance Announced It Would Acquire FTX| NextAdvisor with TIME

The crypto market is having a no good, very bad week.

This week’s crash brings a sudden reversal after weeks of relative stability for bitcoin and ethereum prices. Both tokens are now down more than 18% over the last week, driven by fresh investor skepticism and souring sentiment on the heels of Binance’s announcement that it plans to buy out rival FTX, after concerns over FTX’s liquidity were raised.

Bitcoin fell below $17,000 for the first time in two years Wednesday afternoon. Ethereum is seeing a similar downturn, falling below $1,200 for the first time since crypto’s crash over the summer. The token continues to plummet, getting dangerously close to falling below $1,100, as of Wednesday afternoon.

While bitcoin and ethereum prices have remained low compared to last year, both tokens had been relatively steady, even in the face of Fed rate increases, tumbling foreign currencies, the continued war in Ukraine and stock market crashes.

“For a long time, bitcoin has aligned itself with broader risk appetite in the markets but it goes without saying that Tuesday was not one of those days,” said Craig Erlam, senior market analyst at Oanda. “Cryptocurrencies have been pummeled at the start of the week with bitcoin down almost 20% in two days at one stage amid concerns over FTX and the implications for the FTT token.”

So, why is crypto tanking after nearly a month of stability? Let’s dig in.

Why Is Crypto Crashing?

The crash is likely due to the unfolding drama happening at FTX, a popular crypto exchange. As a result of a significant liquidity crisis at FTX, Binance CEO Changpeng Zhao announced Wednesday that Binance will acquire FTX. Binance is the world’s largest centralized crypto exchange, and FTX was one of its biggest competitors. 

Many investors have become disheartened following the news, since FTX’s founder Sam Bankman-Fried, hailed as a “white knight” of the crypto industry, has now lost more than 94% of his wealth in a single day, according to Bloomberg.

“Today is a bad day in crypto,” says Edward Moya, a senior market analyst at Oanda. “Binance had to step in to save Sam Bankman-Fried’s FTX crypto exchange. [He] has been the white knight during this crypto winter and a liquidity crunch from him has triggered a wave of uneasiness across the cryptoverse.”

The terms of the deal haven’t been announced yet, but investors are already wary of the kind of attention this will draw from regulators. Moreover, the swift crash of one of the world’s largest and fastest-growing crypto exchanges within days (when no red flags appeared to be present) is infusing further skepticism in an already battered market during a year of economic turmoil.

What Should Investors Do During This Period?

So, what should crypto investors do in light of this? Nothing, experts say. If you’ve invested in crypto for the long-term using a buy-and-hold strategy, price swings are to be expected and big dips are nothing to be overly worried about. 

Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio, as long as your crypto investments don’t stand in the way of your other financial goals. Always prioritize saving for an emergency, paying off high-interest debt, and contributing to a traditional retirement plan before ever investing in crypto. If you’re a good spot financially and ready to enter the market, experts say now may be a good time to buy bitcoin or ethereum while prices are low, keeping in mind that prices could fall down more.

Experts recommend that you only dedicate 3-5% of your investments to crypto and only invest what you’re OK with losing.