Ether, Solana Trade at Premium on FTX – Here is (Probably) Why

Ethereum's native token (ETH) and Solana's SOL are drawing higher prices on troubled crypto exchange FTX relative to Binance and other platforms. The unusual market dynamic has observers scrambling for an explanation.

At press time, ether traded at a premium of $52 or 4.5% on FTX compared to Binance, data from the charting platform TradingView show. SOL meanwhile traded at a premium of nearly $2 or 11%. A similar premium is seen in FTX-based perpetual futures contracts tied to BTC and ETH.

The premium stems from FTX-based traders switching from cash and cash equivalents (stablecoins) to major cryptocurrencies in the wake of the exchange stopping clients from taking direct custody of their crypto and fiat funds and signaling potential bankruptcy, according to Markus Thielen, head of research and strategy at Matrixport.

"While FTX pricing might not be in line with other exchanges anymore, traditional bankruptcy procedures always favor the asset holders over the cash holders as assets should be assigned to users. Co-mingled or not," Thielen told CoinDesk. "Hence, users with trapped assets on FTX could be putting their money into major tokens in hopes of receiving some recovery value as their name would / should be assigned to that asset."

"That’s why ETH is trading at a premium," Thielen said.

In other words, users are more likely to receive some value if they hold crypto assets rather than cash or cash equivalents. And that's probably prompting FTX-based traders to snap up coins, leading to relatively higher prices on the exchange.

The chart shows spread between ether's price on FTX and Binance. (TradingView)

FTX's troubles began early this week after Binance moved to liquidate its holdings of the FTX token (FTT) in response to a CoinDesk report showing FTX's sister concern Alameda holding large amounts of illiquid FTT tokens on its balance sheet.

On Tuesday, Binance offered to bail out FTX only to backtrack from the deal late Wednesday. FTX CEO Sam Bankman-Fried told investors that without a cash injection, the company may have to file for bankruptcy.

Synthetic withdrawals

Per some observers, the FTX premium in the perpetual markets results from clients executing "synthetic withdrawals" from the troubled exchange.

Users are supposedly executing a synthetic or paper withdrawal by purchasing (going long) ETH, SOL perpetual contracts on FTX and selling or shorting an equal amount on Binance, creating a market-neutral or delta-neutral position. That way, users get custody of their funds, at least on paper, and stand protected against an extended price slide.

"It's a synthetic withdrawal play. The thesis is that if FTX goes down, markets go down and users get paid on their short positions outside FTX even if FTX balance becomes worthless," Lewis Harland, portfolio manager at Decentral Partk Capital, told CoinDesk.

Crypto hedge fund Galois Capital, which predicted the Terra turmoil early this year, voiced a similar opinion in a Tweet thread.

"In the case of the world where the acquisition deal goes through, you are roughly flat (lose a bit on the basis). In the case of the world where the acquisition falls through, the losses on FTX don't matter much because you can't get your money out anyway, but you win on the short Binance leg," Galois said.

The assumption here is that a potential FTX bankruptcy will trigger another round of panic selling in the market. And if FTX secures funding, clients will be made whole. However, both things are not promised.

After Binance backed out from a bailout deal, investors may have priced in a potential bankruptcy. And markets may bounce once the bankruptcy is confirmed in a classic "sell the rumor, buy the fact" trade, yielding losses on the short trade taken outside FTX.

Further, a trader can get liquidated on both exchanges due to high volatility. Liquidations occur when the market goes against the bullish/bearish position, leading to margin shortage.

According to Galois Capital, the strategy seems the best fit for a token like SOL that would generally do poorly in both deal and no-deal states.

"Since the current SOL value is the superposition of both the deal and no deal worlds, if it ends up being a deal, SOL should have a short-term rally and if it ends up being no deal, SOL should fall," Galois Capital noted.

"The upside is shallower because who actually wants to buy SOL in the current environment where everyone is relatively poorer and there is an overhang of unlocking Alameda tokens which will be continuously liquidated over time," the fund added.