The story of the rapid failure of the FTX cryptocurrency exchange. How, in less than a year, FTX went from a $32 billion Super Bowl ad-buying company to worthless. The sudden fall of FTX, one of the largest cryptocurrency exchanges in the world, has sparked renewed calls from both the cryptocurrency industry and lawmakers for clear rules to control the emerging world of digital asset trading.
The collapse of the FTX exchange wiped out more than $180 billion from the crypto market as digital assets across the board are under massive selling pressure.
FTX, led by Sam Bankman-Freed, which has been known in the crypto industry for bailing out other troubled crypto businesses, may now go bankrupt if it doesn’t find a buyer soon. The exchange handles investments for non-US residents, while the separate FTX US exchange is for US residents.
The massive failure of the FTX exchange is not good news for the crypto industry, Binance’s Zhao said on Wednesday and will lead to increased scrutiny from regulators while obtaining licenses around the world will become more difficult.
Crypto exchange FTX: rapid growth and rapid fall
About a year and a half ago, Sam Bankman-Fried’s FTX crypto exchange bought the naming rights to the Miami Heat’s sports stadium in Florida for $135 million.
Less than a year ago, FTX raised $400 million at a $32 billion valuation, talked about a possible IPO, and hired Larry David to star in a Super Bowl commercial.
Two months ago, FTX was bailing out failed crypto firms that went bankrupt during the crypto crash, giving Bankman-Fried a reputation as a modern-day John Pierpont Morgan to keep the crypto industry alive.
Today, all this has disappeared in the spectacularly huge collapse of the FTX crypto exchange, which is likely to lead to even more pressure and leave a “serious scar” on the face of the crypto industry.
“It will most likely end up in a long lawsuit and hopefully clients get as much of their losses as possible, but right now we don’t know how big the hole is,” Dan Ashmore, an Invezz crypto analyst, told Insider.
“We don’t know what FTX did with client funds. FTX is not a bank. It should not be subject to a liquidity crisis. Assets don’t even have to be backed 1:1. Assets should just be… there.” Once again, it is retail investors who can pay the biggest price,” Ashmore said.
However, the biggest implications could be for the crypto industry as a whole, as the one crypto exchange (and billionaire) that was seen as the savior of the crypto industry and potential support for the industry is now helpless. We will soon find out how many cryptocurrency failures investors can survive.
How did all this happen and how did we get here?
2017-2021: Bankman-Fried golden era
Sam Bankman-Fried began his career in 2014 as a trader with Jane Street Capital, a stock trading company and one of the largest market makers in the world.
This experience helped Bankman-Fried decide to start trading bitcoin from a quantitative perspective, as he used timezone arbitrage, which allowed him to buy bitcoin in the US at one price and then immediately sell it in Japan for a tidy 10% profit.
Having created Alameda Research in November 2017 to specialize in the quantitative trading of cryptocurrencies, Bankman-Fried repeated his trading strategy for years and ended up making billions of dollars in profits.
It was with these profits and investments from Changpeng “CZ” Binance that Zhao Bankman-Freed co-founded the cryptocurrency company FTX in May 2019.
Bankman-Fried was in the right place at the right time as the total value of the cryptocurrency market surged from $200 billion in May 2019 to an all-time high of almost $3 trillion at the end of 2021. This surge was fueled by retail investors as COVID-19 stimulus checks led to active speculative trading in digital tokens. This prompted FTX to grow its account base to over 1 million.
The hype allowed FTX to raise $900 million from high-profile investors at a market valuation of $18 billion in July 2021. Shortly thereafter, the company raised another $400 million at a market valuation of $32 billion in January 2022.
FTX investors include well-known companies such as Sequoia Capital, Softbank, Tiger Global Management, NFL star Tom Brady, and even the Ontario Teachers’ Pension Plan. All investor shares may soon be wiped out.
Because using tailwind leverage and volatility to succeed is a double-edged sword: the fall can be steep and fast.
2022: crypto winter
Most cryptocurrencies peaked at the end of 2021, with bitcoin hitting around $69,000, after which crypto market sentiment began to crumble. A change in market sentiment was inevitable as investors began to realize that the almost two-year period of stimulus checks and 0% interest rates would soon end as the US Federal Reserve focused on curbing inflation.
When the January 2022 sell-off extended to large stocks, the fall in cryptocurrencies only got worse. The entire market value of the cryptocurrency market has fallen by about 50% from a November peak of $3 trillion to $1.5 trillion in January. Today, the total market value of the crypto market is $831 billion, according to CoinMarketCap data.
By mid-June, the drawdown in cryptocurrency was more than 70%.
As Warren Buffett once said, “It’s only when the tide comes in that you discover who’s been swimming naked.”
And the tide just ended.
May-September 2022: SBF sniffs opportunity in Terra implosion
The biggest crash in crypto tokens, including luna, terraUST and Celsius, wiped out tens of billions of dollars and showed investors just how much leverage many in the industry are leveraging to boost returns.
And ultimately, this leverage contributed to the collapse and bankruptcy of various cryptocurrency companies, including Three Arrows Capital, Voyager, BlockFi, and Celsius, among others.
Bankman-Fried’s first major deal amid the crypto crash was BlockFi, as FTX signed a deal with a troubled lender to get a $240 million option to buy the company and provide it with a $400 million revolving line of credit to help address a liquidity crunch.
Crypto firm FTX also acquired Canadian trading platform Bitvo and won a bankruptcy case against brokerage firm Voyager Digital for about $1.4 billion. These acquisitions by FTX helped build confidence and stabilize a turbulent market.
August-October 2022: regulators start watching the crypto market
The departure of senior figures from Alameda Research (CEO Sam Trabucco) and FTX (President Brett Harrison) is viewed by the market as unexpected but manageable.
Harrison’s departure came after he erroneously tweeted that FTX accounts were insured by the FDIC. This led to a cease-and-desist letter from the Federal Deposit Insurance Corporation accusing the company of making false and misleading statements. The company has withdrawn its statements.
In October, Texas regulators launched an investigation into 8% yield accounts offered by FTX, alleging that they are in fact unregistered securities that violate safety regulations.
November 2022: FTX is falling apart at the speed of light
The crescendo of the FTX explosion this week began with a report from CoinDesk that found that Alameda’s balance sheet consisted of billions of dollars of its own FTX token, FTT, and that it had inflated its value.
This report spooked one of FTX’s early investors: Binance. This rival crypto exchange sold its stake in FTX in 2021, but it received half of the payments from FTX in FTT tokens, and they remained with it.
Binance began liquidating its FTT tokens, which essentially led to an FTX “bank run” where the funds were withdrawn and the FTT token price fell over 80%. Of course, this shocked Alameda Research as well, and speculation continues that both companies may have had leverage over this.
Within one day of the crash, an unexpected tweet from Binance’s CZ announced that he had signed a non-binding letter of intent to acquire FTX. This deal fell apart a day later, as Binance pulled out after being unimpressed by an audit by crypto company FTX.
Now the fall in the market continues. Unconfirmed reports surfaced of customer funds being misused, a $6 billion funding shortfall, and FTX initially approaching Wall Street for a $1 billion bailout.
The SEC and CFTC have launched an investigation into the company, and the biggest concern is what is happening to client funds on the platform. If the case goes to bankruptcy court, things could get even worse.
The Bahamas Securities Commission took action to freeze the assets of FTX Digital Markets. The commission also asked the Supreme Court to appoint an interim liquidator for FTX.
California announces investigation into “apparent outage” of FTX crypto exchange. The California financial regulator issued a consumer warning announcing an investigation into FTX and urging affected customers to contact DFPI.
Follow the news. The history of the failure of FTX will lead to many changes in the crypto industry.