The Story Behind the Fall of FTX

The match that lit the fire leading to the fall of FTX was a November 2nd scoop by CoinDesk revealing that Alameda Research, a quantitative cryptocurrency trading firm run by Sam Bankman-Fried, the founder and now former CEO of FTX, was experiencing a solvency crisis, which led to a collapse in FTX’s native cryptocurrency, FTT.  FTX held a position worth $5 billion in FTT, the native token of FTX. Alameda’s investment foundation was also in FTT, the token that its sister company had invented, not in fiat currency or another cryptocurrency. That prompted concern across the cryptocurrency industry regarding Bankman-Fried’s companies’ undisclosed leverage and solvency.

What Happened?

Following the aftermath of the FTT sell-off, FTT’s value plunged over 80%. That is an unprecedented drop, valued at more than $2 billion, and it sent shockwaves through the crypto world. The ripple effect of this event is being felt across the industry and is likely the sole factor behind the recent decline in cryptocurrencies.

Some experts believe that although the depths of the quake caused by FTX will shake even the strongest believers in crypto, it is the wake-up call needed to force exchanges into a more transparent proof-of-reserves balance sheet model, which may be exactly what is needed to ensure the operational integrity of exchanges going forward.

Contributing Factors

But what is at the heart of all the drama? What began as finger-pointing and blame-shifting soon turned much more sinister. It’s been revealed that Bankman-Fried used his customers’ funds from FTX to prop up his failing empire. And when the truth came out, chaos ensued.

When the news broke, Changpeng Zhao, the CEO of popular crypto exchange Binance, publicly announced that his company was selling off all of its holdings in FTT. The reason?  Zhao claimed to have inside knowledge that Bankman-Fried was misusing company funds. Zhao also briefly considered bailing out FTX, but after a cursory review of its financials, Binance backed out.

Following this revelation, FTX suffered a staggering influx of customers and investors withdrawing their funds from the company. Bankman-Fried attempted to dissuade his customers by assuring them that their money was safe and that FTX was not in any financial trouble, but his words fell on deaf ears.

The withdrawals continued, and the value of FTT crashed as a result. The domino effect took hold, and the rest, as they say, is history.

The Aftermath

It’s not an understatement to say investors are furious FTX filed for Chapter 11 Bankruptcy in the US on November 11th, and it’s now a race to try and recover at least some of what was lost. Add to that, it’s looking like FTX was hacked by a high-level insider to the tune of $600 million, who had access to the customers cold storage wallets.  The thief made a fatal error in transferring the crypto revealing his identity, which is now known by an analyst at the Kraken exchange.  With that knowledge, hopefully some of the stolen crypto can be recovered to help compensate the victims of the crash.

It’s still too early to tell how this will all shake out. But one thing is certain: FTX is in hot water, and Sam Bankman-Fried is under investigation.

The road to recovery will be long and difficult for FTX. After the resignation of Bankman-Fried, new FTX CEO, John J. Ray III, who also stepped in to clean up after the Enron financial scandal, issued a scathing assessment of “unprecedented” poor management practices by his predecessor, Sam Bankman-Fried, in a series of filings in a Delaware court.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said in a court document filed on Thursday. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

It’s important to note that Bankman-Fried hasn’t been officially charged and remains innocent. If proven guilty, however, he could face a lengthy prison term and fines.

The Bottom Line

So, what does all this turmoil mean? Sources say that FTX is officially insolvent. If that’s the case, it would mean that the company is unable to pay its debts, and the crypto community will be watching closely to see how this all plays out.

The Future of Bitcoin and Crypto

Until the extent of the collateral damage to the industry flushes out, cryptos could continue to experience volatility and downward pressure. Since the FTX crash, Bitcoin has been rangebound between $17,500 and $15,800, and Ethereum between $1,100 and $1,295, but while the faint of heart are exiting the market, the hodlers and believers are snatching up the bargains.

No doubt about it, the crypto world has been dealt a major blow. The market hasn’t seen this kind of turmoil in some time, and it’s sure to have a continued ripple effect throughout the industry. One thing is certain: the events of the past few weeks have shaken things up, and it’s going to take some time for the dust to settle.

Investors are understandably upset and are calling for investigations. It will be interesting to see what other news bubbles to the surface as more information becomes available. In the meantime, what can you do to protect yourself?

The best way to protect yourself is to diversify your portfolio, and stay armed with the latest information.  That will help you be better prepared to weather any sudden market shifts.



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