Just a month ago, FTX was the most reputable centralized exchange aside from Binance, raising $420 million at a $25 billion valuation in their last funding round. Now? The exchange sits insolvent with the founder Sam Bankman-Fried losing almost all of his $26 billion net worth.
What happened to bring this about? Let’s dive in…
How Alameda Ties Into The FTX Story
The trading firm Alameda was co-founded by Sam Bankman-Fried (SBF), who is also the Founder of FTX. This is the first link. While Alameda was founded in 2017, and built from the ground up, the FTX exchange was created in 2019 banking off the success of SBF’s first project.
Although both are separate entities, they were both connected through SBF, and Alameda traded most of their funds on the FTX exchange. Without a board of directors or anyone to keep his decisions in check regarding billions of dollars of investor and depositor funds, SBF overlapped assets from Alameda using them to boost FTX’s appearance.
How The FTX Meltdown Began
Weeks ago on November 2nd, reports from CoinDesk revealed the trading firm Alameda co-founded by Sam Bankman-Fried had some peculiar elements on its balance sheet.
Alameda held $14.6 billion in assets, which is not a remarkable number for a trading firm. However, where those numbers were allocated is a different story.
$3.6 billion was unlocked FTT tokens (the native FTX token).
A further $2.6 billion was FTT collateral.
Of the $14.6 billion, there was collateral against $8 billion of liabilities.
This leaves only $400 million in genuine assets, as the $6.2 billion FTT was essentially created out of thin air by Sam to boost the trading firm’s bundled assets.
Binance Reacts
4 days later, the CEO of Binance Changpeng Zhao (CZ) announced via Twitter that Binance was planning on selling 100% of their FTT tokens which they had acquired as part of an exit deal after being an early investor in FTX.
Binance had two reasons for this:
Risk management in light of the LUNA crash, Binance wanted to play it safe with the newfound information regarding the Alameda balance sheets.
Binance also stated that they will not support SBF for his lobbying against fellow crypto establishments while in discussions with US regulators.
CZ reassured the public that Binance would slowly release their FTT tokens over a 2-month timeframe so as not to disrupt or cause any significant volatility in the market.
Under Pressure
Reports of slow fund transactions, as well as a $65 million per day exiting the trading firm, ignited crypto Twitter. Despite Sam Bankman-Fried constantly reaffirming that all is well with Alemeda and FTX, doubt and speculation about the legitimacy of both crypto firms ensued. Many began alerting others to take their funds off FTX.
SBF tweeted within hours of the social eruption that “A competitor is trying to go after us with false rumors. All is fine.” These digs were clearly aimed at Binance’s CZ who had been the first to exit FTT.
Shortly after, the FTX token began seeing a significant loss in value, dropping over 30% in 3-4 hours.
Binance Attempts To Bail FTX
In a turn of events on November 8th, SBF offered to sell FTX to Binance to restabilize the assets and stop what he called a “liquidity crunch.”
CZ then signed a letter of intent to acquire but with the possibility of backing out if he so chose.
The following day, both FTX’s and Alameda’s websites went offline, and rumors began circulating that the FTX legal team had quit.
Binance released this statement that same day:
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.”
Market Upset
The bearish nature of the developing FTX situation sent Bitcoin to a new 2-year low at $15,600 per coin, dragging the entire crypto market into a blood bath of red.
SBF then sent out a lifeline to investors, claiming he needs $8 billion urgently.
Over the next couple of days, around 20 or so countries including Japan, Turkey, Australia, The Bahamas, and the US shut down or heavily restricted access to FTX.
The former head of the institutional arm at FTX tweeted admittance to an $8.8 billion hole of missing funds.
Insolvent
On November 11, both FTX and Alameda officially filed for bankruptcy, declaring the exchange and the trading firm insolvent. Multiple accounts funneled the last resources from FTX investors and users into a singular wallet, which many believed to be SBF’s doing, worth $105.3 million in ETH. Speculation that SBF had fled to Argentina began surfacing once his $40 million penthouse was listed for sale.
Authorities from the US and the Bahamas are currently taking legal action against SBF personally.
Summary & The Result
In essence, Sam Bankman-Fried created an abundance of worthless FTT tokens to prop up a trading firm and an exchange, while also using the resources to visually amplify their impact. The damage of this man’s fraudulent activity shows why crypto is far safer when decentralized – as is its sole purpose – without the corruption of human greed or contrasting ideals.
One change this will bring is stronger regulation and transparency regarding exchanges and their activity.
The effects of the current FTX saga are yet to be fully realized, however, it has hurt the crypto market significantly and strained a number of other exchanges.
It’s a sad reality that many people lost their investments when they left them on FTX, which was thought to be a reliable exchange. We’ve probably said it too many times this year, but this is yet another example of the famous saying…
Not your keys, not your coins.
Keep custody of your own crypto and don’t ever store them permanently on an exchange.