The announcement of the liquidity crisis at FTX, which was valued at $32B in January by investors such as SoftBank and BlackRock, caused a stir in the cryptocurrency community. The value of the sector, whose worth has plunged by almost two-thirds this year as central banks have adopted tightening monetary policy, has been further hurt as the price of key currencies crashed, with bitcoin falling to its lowest level in almost two years. After traders rushed to take $6B compared to a normal daily withdrawal of only tens of millions of dollars from the platform in just 72 hours and rival exchange Binance abandoned a proposed rescue deal, FTX filed for bankruptcy last Friday; a move that might shake central bankers furtherly and slow down the legitimation of digital currencies around the world.
So what’s the story behind this collapse? In 2019, Binance bought 20% of FTX shares for around $100Mn aiming for a partnership with FTX; however, Binance didn’t seem to be as cooperative as FTX hoped, so 2 years later FTX decided to buy back Binance shares with around $2B USD.
Sam Bankman- Fried, also known as SBF and the founder and former CEO of FTX, is also the founder of Alameda Research LLC which is a principal trading company holding around $15B worth of assets, 97.3% of which are held in FTT. The company secretly suffered from a liquidity crisis with only the knowledge of SBF. According to CNBC, the company only suffered from a liquidity crisis, but it is also accused of misusing the customers’ deposits. According to CNBC, none of this was communicated to customers. Under U.S. securities legislation, it is legally prohibited to combine client funds with those of counterparties and to trade them without the customers' explicit permission. The terms of service for FTX are likewise broken. Sam Bankman-Fried said the company's recent bankruptcy filing was due to problems with a leveraged trading position, but he declined to comment on claims of misappropriating customer monies. SBF told CNBC “A margin position took a huge hit,”. The price of the FTT token fell 75% in one day, rendering the collateral insufficient to finance the trade.
Changpeng Zhao, Binance CEO, accelerated the crisis after announcing that Binance is planning to sell more than $500Mn worth of FTT dwarfing its average daily trading sum because of “new disclosures that have come to light” alluding to the November 2nd CoinDesk report and Alameda’s unknown funds. SBF asked Zhao for a rescue deal, but after accepting the deal and ordered to cease sales of FTT. After completing the “corporate due diligence”, he announced that he won’t acquire the company. Zhao commented on Wednesday “The issues are beyond our control or ability to help”. Zhao tweeted “Sad day. Tried,” with a crying emoji.
Bankman-Fried announced the closure of Alameda Research and resigned as CEO of FTX. After a rumored $477 million hack, the business has since announced that it is stopping trading and withdrawals and taking digital assets offline. And Since early November, other crypto exchanges have frozen FTX accounts and any affiliation with Alameda to avoid the conundrum associated with them such as Kraken.
The FTX crisis has put the spotlight on all crypto exchanges with people asking for more transparency and scrutiny. A ripple effect caused a bearish sentiment in the crypto market with Bitcoin, Ethereum, Dogecoin, Solana, and other cryptocurrencies nosediving, as seen in the chart below.
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Figure 1: Solana, Bitcoin, Ethereum, and Dogecoin based on TradingView
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