Crypto Chaos - The Fall of FTX & The Future of Crypto
What the **** Happened? by Breaking Finance
-> Alameda Research founded in 2017 by Sam Bankman-Fried (SBF), a crypto trading firm taking advantage of arbitrage opportunities in Bitcoin (+others) prices from one exchange to another.
-> By 2019 Alameda had made over $20M in trading profits. This success led to the creation of FTX, a crypto exchange anyone could use, with a $100M investment from Binance.
-> By early 2022 FTX had become one of the biggest crypto exchanges in the world with over $20 Billion in customer deposits, $1B in revenue and they had raised nearly $2 Billion from outside investors.
-> At some point between 2019 and 2022 Alameda Research switched from delta neutral arbitrage and market making strategies, to being levered long crypto assets as well as yield farming. Its exposure to FTX's own coin FTT was particularly large.
-> In 2022 when the crypto market declined due to collapses/near collapses of BlockFi, Terra Luna and others, SBF stepped in in some cases to provide liquidity. SBF was hailed by the media as the "new JP Morgan" while he himself claimed he wanted to donate all the money. However, when only more problems arose and the prices of Bitcoin kept going down, the stage was fully set for the end of FTX and Alameda.
-> In November 2022, the CoinDesk article (below) came out and CZ the CEO of Binance said he would sell his firm's FTT holdings. This sparked a run on FTT followed by a run on FTX itself with depositors attempting to withdraw their holdings. For a few days Binance explored buying FTX then declined.
Source: CoinMarketCap.com
-> FTX and Alameda both file for bankruptcy and the full extent the disaster begins to unravel. Shockingly, it seems like FTX was transferring customer deposits directly to Alameda for use as leverage to trade. While Alameda/FTX may have committed many different crimes, in all financial markets the theft of customer deposits is the most serious offense of all as it destroys trust in all financial institutions.
Excerpt from CoinDesk Article that Helped Spark the Collapse:
"Billionaire Sam Bankman-Fried’s cryptocurrency empire is officially broken into two main parts: FTX (his exchange) and Alameda Research (his trading firm)... But even though they are two separate businesses, the division breaks down in a key place: on Alameda’s balance sheet, according to a private financial document reviewed by CoinDesk
The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”
“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token”" - read more on CoinDesk here
Excerpt from CoinDesk Article Regarding the Scale of the Fallout:
"Seemingly because of their known close ties, worries about Alameda’s balance sheet translated into a rapidly accelerating mass exodus from FTX. The exchange saw $6 billion in withdrawals in the 72 hours before things reached a head on the morning of Nov. 8, according to internal messages seen by Reuters.
According to Coinglass data, that for a time left FTX with a balance of, unbelievably, just one bitcoin. That has now rebounded to 36 BTC, compared to more than half a million BTC each held by Coinbase and Binance." - read more on CoinDesk here
Breaking Thoughts: On the Future of Crypto
While the full extent of the damage is not yet known, nor is it known how much money will end up being returned to customers (if any), what's clear is this is unprecedented in scale, more comparable to Enron or Lehman than to crypto collapses of the past.
Many online are arguing for more regulations, laws, oversight and other measures to ensure something similar does not happen again. Even crypto die hards are uniting with crypto haters to call for changes. Some are declaring the "end" of crypto itself.
While it is obvious that FTX was a massive abuser of customer and all financial norms that exist across markets, having effectively stolen customer funds and even traded against them among other crimes. This is ultimately a problem of the crypto exchange acting as a financial intermediary. Exchanges should be regulated as all other financial institutions are.
However, crypto is supposed to be decentralized with users in control of storing and sending their own coins (no middle man!). The real shift needs to come from end users, utilizing cold wallets or software wallets on their own devices to store their crypto and use it to send/receive payments or trade off of automated (DeFi) exchanges.
The 800 Pound Gorilla in the Crypto Room: Is the Worst Over?
Unfortunately, as bad as FTX is there is an area of crypto that could lead to another big leg down for all coin prices.
That is stable coins, specifically the largest one - Tether. Earlier this year the synthetic stable coin Terra-Luna collapsed, and that caused large drops in all coin values. However, Tether is the largest stable coin claiming to have over $65 Billion in reserves. If there was ever a run on Tether, which is used to facilitate billions of dollars of USD to crypto (often Bitcoin/Ethereum) trades than the ability for any exchange to function would be seriously impeded.
Such an event while by no means certain, could lead to the worst crypto bear market (in terms of % loss, $ value loss and length of time) since the creation of Bitcoin in 2009. All investors, users, builders and supporters of crypto projects should be aware of such extreme risks and never invest (in any asset class) more than they can afford to lose.
While these issues are serious for the industry in the short term; the world's best engineers and designers are working to build exciting Web 3 and other crypto products. The long term future can still be very bright.
Read our Guide to Investing in Crypto to learn more about the benefits and risks!
See you Soon!
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The Market News Reel for this month! Get the most important market news & updates for the week ahead! Major headlines, excerpts from news sources are shown above. "Breaking Thoughts" section is purely our opinion and not investment advise of any kind.