Tuesday, January 31

The Fall of FTX

Man working on laptop.

Shock waves are being felt across the cryptocurrency industry and the broader financial system, as news of the collapse of FTX goes worldwide. On Tuesday, it was revealed that FTX, one of the biggest cryptocurrency exchanges, and the property of multi-billionaire entrepreneur Sam Bankman-Fried, had been saved from a liquidity problem by its main competitor Binance. 

A day later though, it all came crashing down. 

Let’s take a look at the events that triggered this massive sell-off of crypto and spooked the whole market. Remember that with the help of the trading tools and platform provided by a trusted and regulated broker such as easymarkets.com, you can conveniently and easily capitalize on volatile conditions like these.

Behind the FTX liquidity crunch”

Only a few months ago, FTX was valued at $32 billion. Its owner, Sam Bankman-Fried, who goes by SBF on Twitter, is an MIT graduate, and a self-made man with a crypto empire that also includes the investment company Alameda Research.

Up until this point, FTX had avoided the liquidity crisis that afflicted cryptocurrencies in 2022 as a wave of contagion shook the market in the aftermath of stablecoin TerraUSD’s $60 billion collapse.

The main issue with FTX recently is that it seems to have been constructed in a similar way to TerraUSD – on a proverbial house of cards. It’s not uncommon in the industry, but FTX supported its own cryptocurrency token, FTT, to fund the exchange’s numerous initiatives, and Alameda’s balance sheet was largely made up of the sister company’s token too. 

SBF’s empire was too vulnerable to FTT price fluctuations. This was pointed out in a CoinDesk article on November 2nd, when the writer questioned the solvency of the exchange based on Alameda’s balance sheet being loaded with FTT.

Alameda’s “unlocked FTT” was worth an estimated $2.16 billion at the close of Q2, making it the third-largest asset on the company’s $14.6 billion balance sheet. Thus, it seemed that Alameda and FTX were not operating as two independent companies, leaving Alameda very vulnerable to fluctuations in the FTT market. 

Sinking ship not worth saving

A day after Binance announced its intention to save FTX, the company chose to back out of the transaction after completing its due diligence and revealed why it had done so via Twitter. 

“Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” the company said.

Binance in its tweets also touched on the fact that recent news reports in regard to the company mishandling customer funds and possible US agency investigations were deeply concerning.

The Fallout

Investor fear has triggered widespread pain. FTT itself has lost 90% of its value this week, but Bitcoin also fell to a two-year low below $16,000 on Thursday, and Ethereum was just shy of $1,196.04 at the time of writing. The total effect of the crisis will take some time to become clear, but wise traders can take advantage of the situation.

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