Why Did FTX Collapse? Explained


Over $150 billion. In three days, that's how much the world's 15 largest cryptocurrencies lost in market value. It's because of the Crypto Exchange platform FTX, which is behind this token, named FTT.

On November 6th, the token's value began to fall, losing more than 80% of its worth in the span of 72 hours. Once seen as a survivor in a struggling market, the fall of FTX has sent shockwaves through the cryptocurrency industry.

So, what went wrong?

Bankman-Fried founded the quantitative trading firm Alameda Research in 2017. Two years later, he started FTX, an exchange platform for buying or selling cryptocurrencies. Right now, he's the majority owner of both firms.

FTX Collapse
Source: DYORspot.com

After its launch, FTX attracted major investments from Silicon Valley and Wall Street. At David Rubenstein show SBF said that, "Yeah, we'd raised a few billion dollars over the course of the last couple years and we're a profitable business."

It grew into the fourth largest cryptocurrency exchange for derivatives trading. Celebrities promoted the platform in ads. FTX was gaining steam, and in the process, often tussled with Binance, the world's largest crypto exchange by volume.

When FTX was getting started, Binance invested in FTX and it was one of the crypto exchange's earliest investors. But FTX, as we know, grew really rapidly and became a very substantial rival to Binance.

As FTX grew in the industry, Bankman-Fried furthered his reputation as a Crypto savior, when digital asset prices collapsed earlier this year. He bailed out firms, spending about a billion dollars. But that image didn't last.

On November 2nd, CoinDesk published a report based on a leaked Alameda balance sheet. According to the leaked data, Alameda claimed it had over 14 billion in assets at the end of June, but most of that was FTX's tokens. Alameda CEO Caroline Ellison tweeted that the balance sheet wasn't complete.

Caroline also said its financial situation is under control, the company is doing well. However, it seems like the market just didn't really buy that, and then traders continue to withdraw from FTX.

FTX and Alameda did not respond to a request for comment. Things escalated on November 6th, when Binance said it would offload hundreds of millions of dollars of FTT. Binance did not respond to a request for comment. The announcement sparked mass withdrawals. That day, FTX processed $4 billion of transactions, many times the normal amount for a day. Some got backlogged, which sparked demand for more.

By November 7th, that number ballooned to $6 billion. On the 8th, a day later, FTX's finances were in crisis. Binance stepped in and said it would buy the company. It seemed like FTX might have solved its liquidity problem. But on the 9th, Binance backed out of the non-binding acquisition.

The next day, The Journal reported that FTX used money from customers to fund risky bets made by Alameda.

It's a shocking revelation for a lot of people in the industry, because even though there has been a lot of speculation about FTX and Alameda research being joined at the hip, nobody could have foreseen that SBF was willing to transfer billions of customer funds at his crypto exchange to help his crypto trading firm.

The Securities and Exchange Commission and Justice Department are investigating FTX, according to a person familiar with the matter.

A spokesperson for the Justice Department declined to comment. Bankman-Fried told investors that FTX couldn't cover withdrawals since its collateral was dropping in value and couldn't be liquidated, according to people familiar with the matter.

On the 11th, Bankman-Fried resigned as CEO and FTX and Alameda filed for bankruptcy. Afterwards, FTX said it was probing a potential hack. More than 370 million worth of crypto funds appeared to be missing, according to crypto analytics firm Elliptic.

On the 12th, The Journal reported that Alameda and FTX executives knew that FTX had lent its customers money to Alameda.

So a lot of retail traders and investors I've talked to are feeling desperate or frustrated. The majority of the people in the industry could not have seen this coming because FTX is such a dominant player.

The fallout has led other companies to tout their reserves and call for more transparency in the industry.

As of November 11th, according to the bankruptcy filing, FTX is estimation of their liabilities would make it the largest crypto related bankruptcy ever filed.

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