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The MIT-educated, Silicon Valley-born Sam Bankman-Fried, commonly known as SBF, founded his cryptocurrency trading company, Alameda Research, in 2017, following stints at trading firm Jane Street and the nonprofit sector.
Two years later, Bankman-Fried and his team introduced FTX, a cryptocurrency exchange platform with benefits including affordable trading costs and sophisticated trading possibilities. According to reports, Bankman-Fried made a fortune from FTX and Alameda, which generated profits of $350 million and $1 billion, respectively, in 2020.
Bankman-Fried had a net worth of $16 billion before this November 10th, but his total wealth peaked at $26 billion. At th, he had already established himself as a significant political donor, recruited celebrities like Tom Brady and Gisele Bundchen to promote FTX, and acquired the naming rights to the Miami Heat's home arena.
What caused the collapse?
Early in November, the cryptocurrency magazine CoinDesk published a shocking article that cast doubt on the stability of Bankman-enterprise.
Even though Alameda Research and FTX are independent businesses, the study discovered that majority of Alameda's assets were linked to the FTT cryptocurrency that FTX created. Technically speaking, there is nothing wrong with it, but FTX's liquidity was called into doubt, according to CoinDesk.
Only a few days later, matters worsened when Changpeng "CZ" Zhao, the CEO of Binance, the company that is undoubtedly FTX's main rival, chose to liquidate FTT stock valued at over $530 million. Customers rushed to withdraw, and FTX struggled to process an estimated $6 billion withdrawals over 72 hours.
After the fall of the Terra (LUNA) crypto token earlier in 2022, Binance CEO Changpeng "CZ" Zhao stated that risk management was the basis for the decision to liquidate the exchange's FTT stake.
FTX’s troubles were beyond saving
When Bankman-Fried unexpectedly announced on Tuesday, Nov. 8, that Binance would purchase FTX and essentially save it, the value of FTT recovered after falling by 32%.
In announcing its decision to cancel the transaction, Binance cited information discovered during its due diligence and concerns about improper handling of user cash and the potential for a government probe. The promise of rescue was temporary, as Binance withdrew from the agreement the next day.
The information caused FTT to drop even further; Bankman-Fried lost 94% of his net worth in one day.
Following reports that Bankman-Fried was looking for up to $8 billion in cash to save the exchange, the Bahamas securities commission froze the assets of FTX Digital Markets, FTX's Bahamian affiliate, on November 10. The California Department of Financial Protection and Innovation disclosed that an inquiry against FTX had begun the same day.
On Twitter, Bankman-Fried acknowledged the liquidity situation and apologized for FTX's inability to satisfy consumer demand. According to Bankman-Fried, FTX calculated leverage and liquidity incorrectly due to "bad internal labeling." He stated that Alameda would stop trading in the same.
Bankman-Fried started contacting other business rivals in the sector, including Coinbase CEO Brian Armstrong, for a rescue but to no effect. Bankman-Fried left her position as CEO, and FTX filed for Chapter 11 bankruptcy. Replaced by John J. Ray III—who had formerly guided energy trading company Enron through bankruptcy proceedings—would take over.
The same day, FTX revealed that around 130 additional associated firms were also involved in the proceedings when it filed for Chapter 11 bankruptcy protection. According to the bankruptcy documents, FTX has assets between $10 billion and $50 billion and liabilities between $10 billion and $50 billion.
How on Earth did this happen?
Bankman-Fried attributed FTX's collapse to a combination of excessive client withdrawals and his inaccurate estimates of the amount of debt FTX had incurred in a series of tweets, saying he "fucked up twice."
However, a Reuters study made the case that more forces could be at work. According to the news service's anonymous sources, Bankman-Fried secretly shifted client assets from FTX to Alameda early this year after Alameda suffered a string of losses. Insider's request for a response from FTX was answered after some time.
SBF’s confusing remarks
After SBF’s troubles became too heavy to bear, the former FTX CEO announced his resignation from the firm. But that wasn’t the end of it all. A few days after SBF apologized to Twitter for his actions, a recent thread from SBF hinted at hihisanting to restart again and expressed his regrets about filing for bankruptcy. SBF later claimed to be working on a solution with FTX, which the current FTX CEO refuted, claiming to have no ties with Sam.
Recently, a conversation between Vox and SBF revealed that SBF solely regretted filing for bankruptcy, claiming he still had the potential to save the firm. However, his actions seem to be desperately driven to counter his actions.
Who else is affected by FTX's failure?
Numerous well-known investors, including SoftBank Vision Fund, Tiger Global, Sequoia Capital, and BlackRock, support FTX. This week, Sequoia announced that it is reducing its investment in FTX from $213.5 million to $0; the illustrious VC company had previously made $213.5 million in FTX.
Then there's Bankman-inner Fried's circle, a team of ten individuals who shared his home and operated FTX and Alameda from the Bahamas. According to CoinDesk, the group comprised his college pals and previous coworkers and was deeply entwined with Bankman-enterprise. Fried's So it's likely that they are also experiencing significant losses. One employee told CoinDesk, "Some staff kept their life savings on FTX." We had faith that everything was in order.
What's the overall meaning?
After seeing a $2 trillion fall in May, the cryptocurrency industry has had a difficult year. The FTX controversy is currently having an impact on the whole crypto sector. According to CoinMarketCap, it caused the sector's value to drop 12% in one day and sparked concerns that cryptocurrency is set to experience its own Lehman Brothers moment.
According to industry insiders, the drama may prompt regulators to try to rein in the cryptocurrency market or make major banks hesitant to allow consumers to trade cryptocurrencies. Additionally, analysts believe that the FTX crisis may spread panic among consumers, prompting them to remove their crypto assets. This is known as contagion.
In a report published on Wednesday, JPMorgan researchers stated that it seemed probable that there would be a crypto reckoning, and experts advised investors to be ready.
Bankrate.com analyst James Royal told Insider on Friday, "As an investor, you should be considering what you're investing in if it might disappear over a weekend." Prices are solely determined by public perception and faith in the potential of cryptocurrencies. If that faith is lost, there is nothing left.
Future of FTX and collapse's effects
As a cryptocurrency exchange, FTX's future is in grave danger. Withdrawals have been prohibited since mid-November 2022, and a warning on the FTX website states that the corporation "highly advise[s] against depositing."
It will take time for the wider repercussions of the FTX debacle on the bitcoin market to become apparent. Investors may become even more hesitant due to FTX, the worst fall in the brief history of cryptocurrencies, who are already wary due to worries about stability and security.
Customers using the FTX platform could not get their assets back, which could lead to legal action. The failure of FTX may prompt the U.S. Securities and Exchange Commission and other authorities to increase their scrutiny of cryptocurrencies, and Congress may feel more pressure to intervene and pass new legislation regulating digital tokens and exchanges.
There will be long-lasting repercussions from the shocking collapse of the third-largest exchange by volume. BlockFi, a cryptocurrency lender, halted client withdrawals on November 11, 2022, and speculations suggest that the company may face trouble in the future. The number of withdrawals on Crypto.com increased between November 12 and 13. Customer withdrawals from Genesis Global Capital's cryptocurrency lending business have been suspended. And the collateral harm has probably just begun.
The fallout from FTX's abrupt slide and collapse will probably affect cryptocurrencies for a long time and may even cause wider market declines. However, the recent developments pose an advantage to the system as better regulation is expected to be infused into the industry, which could make crypto more adoption worthy in the future.