The Reasons Behind FTX Collapse: True Story Revealed
4 min read · Nov 27, 2022
The Reasons Behind FTX Collapse: True Story Revealed
FTX collapse sent some rude shocking waves to everyone across the crypto industry. After all, it's not just any crypto exchange involved in the collapse saga, but the world's third-largest cryptocurrency exchange (sorry, it was the world's third-largest exchange). This exchange was touted to outgrow Binance as the largest crypto exchange. Unfortunately, that dream is in ashes now.
What really happened to FTX? A lot of people seem to have shallow information about the whole saga, but as discussed on Expelee's Twitter Space, we will, in this article, reflect on the Founder and what led to the collapse. Let's get started.
Who is the Founder of FTX?
Sam Bankman-Fried, popularly known by the initials SBF, is the founder of FTX. He is also the former CEO of the cryptocurrency exchange. FTX became one of the largest exchanges in three years, with a $32 billion valuation courtesy of SBF's aggressive and strategic marketing.
SBF is the co-founder of a quantitative trading firm Alameda Research, a firm that specializes in yield farming and trading volatility. Although SBF denied claims that Alameda and FTX shared any close ties, it was eventually discovered that they had something in common. The link between the two companies eventually contributed to their downfall.
Before the FTX saga, SBF was widely recognized as a key crypto frontrunner. He bailed out several crypto firms in distress. He facilitated deals worth $1 billion. Besides, he was popular in the political scene as a lobbyist.
So, What Happened?
As revealed by an anonymous Wall Street Journal report, Alameda Research suffered huge losses between May and June 2022, which caused its sister company to lend the trading firm more than 50% of customers' funds in reserves without permission from the customers. This decision was contrary to FTX's terms. Before we dive down into the Alameda crisis, let's discuss succinctly, the key reason behind FTX's demise — the FTT token.
However, a CoinDesk report released some shocking information. After revising Alameda's financial document, it was discovered that the company's balance sheet was full of FTT tokens, which means it was the largest owner of FTT. Remember, SBF had said FTX and Alameda were independent of each other, so the balance sheet raised many questions about Alameda's assets and why they were in FTT and not in fiat or any other cryptocurrency. This seems to be a red flag.
On hearing this, Binance decided to sell off its portion of the token (about $500 million worth of FTT). After announcing this sell-off on Twitter, an upsurge in withdrawal on FTX followed. Of course, an announcement of this magnitude from an exchange like Binance is bound to cause chaos. Users withdrew over $6 billion in three days, and FTT lost its value. With no money to process withdrawals, FTX halted withdrawals and filed for bankruptcy protection.
Conclusion
The spectacular collapse of FTX has further dented the image of the industry that's yet to recover from the Terra Collapse, falling prices caused by the Russia-Ukraine war and other macroeconomic factors. Even though, FTX's fall is a reminder of how yet risky and evolving crypto is, the event also strengthens the call for more regulations. Going back to TradFi is never a solution, but creation of more DeFi structures with high level of trust is much more the way forward.
About Expelee
Expelee is a product-based aspirational Web3 Start-up. Coping up with numerous solutions for blockchain Security and constructing a Web3 Ecosystem from Deal making platform to developer hosting open platform, while also developing our own commercial and sustainable blockchain.