The Collapse of Crypto Exchange Giant FTX

In late November 2022, one of the world's largest crypto exchanges FTX filed for bankruptcy and its chief executive officer, Sam Bankman-Fried, resigned, a downfall that shocked many in the crypto world.

Who is Sam Bankman-Fried?

Source: nypost

Sam bankman-Fried is an American investor and entrepreneur who founded crypto currency exchange FTX and cryptocurrency trading firm Alameda research.

Bankman-Fried started his career as a trader at Jane Street capital after graduating with a degree in physics from the Massachusetts Institute of Technology in 2014. At jane street, Bankman-Fried specialized in arbitrage trading strategies focused on exchange-traded funds. An arbitrage trade involves a trader purchasing an asset in one market and selling it for a higher price in another market, making a profit on the price differential.

Bankman-Fried worked at Jane Street for three years before discovering cryptocurrency in 2017. At the moment, Bitcoin was gaining traction in mainstream finance, trading at around $10,000 in late November 2017. Despite this, the industry was still far from being concentrated. While there were many buyers flooding the market, there were few firms providing platforms for purchasing and selling cryptocurrency.

He saw this as an opportunity for entering the market and began by focusing on Japanese arbitrage trade, which involved buying bitcoin in the U.S. and selling it in Japan. As money started flowing in, Bankman-Fried founded the trading firm Alameda Research in November 2017, shortly after turning 25. Not so long after, he founded crypto exchange FTX in 2019.

What is FTX?

Before going bankrupt, FTX was one of the largest cryptocurrency exchanges in the world, with an estimated revenue of approximately $1 Billion per year. FTX enabled customers to trade digital currencies for other digital currencies or traditional money, and it had a native cryptocurrency known as FTT.

How did FTX collapse?

It all began last year when Changpeng Zhao, the chief executive officer of Binance, the world's largest crypto exchange and FTX's rival, sold his stake in FTX back to Bankman-Fried. In return, Zhao was paid partially with FTT tokens.

In Early November within the same year, the crypto publication CoinDesk published a report highlighting FTX's and Alameda's weaknesses. CoinDesk found that Alameda research held an unusually large amount of FTT token, which signalled that the two companies were highly interrelated and dependent on each other. The way the two companies were set up meant that if one is adversely affected the other would also be negatively impacted.

In response to this information, Binance later announced that it would sell its FTT tokens, an announcement that led to plummeted FTT price as traders panicked and rushed to withdraw their money with anticipation that the company would collapse.

Within a time span of three days, the requests for withdrawals received by FTX amounted to an estimated $6 Billion. The problem, however, was that the company lacked the liquidity to fulfil all the requests; that is, it did not have the money to pay back the customers.

In an attempt to help mitigate the situation, a few days later, Binance announced that it had reached an agreement to bail out FTX by buying the company. In spite of this announcement, soon after, the company changed its stance, declaring that it would no longer buy FTX. Binance justified its decision by saying that it reached the conclusion "as a result of corporate due diligence'.

Left with no other options, in the late November FTX officially filed for bankruptcy, making it the largest ever crypto bankruptcy.

What about the customers?

According to several reports, the company owes its 50 biggest creditors around $3 billion. However, evidence suggests that it may have well over a million creditors.

With the company going bankrupt, the savings of hundreds of thousands of customers who deposited their money on the FTX platform are at risk. FTX's new chief executive officer, John Ray III, and his team, managed to secure around $740 million worth of crypto currency belonging to FTX. Nevertheless, this amount represents only a fraction of what the team aims to recover.

What does this mean for the crypto industry?

Due to the high risk associated with cryptocurrency trading, the crypto industry has always been characterised by a high level of uncertainty, with risk-averse customers having a hard time trusting companies with their money. With the collapse of FTX, this pessimistic view of the industry is likely to prevail even more.

While the industry has managed to bounce back from similar calamities in the past, the downfall of a company as large as FTX means that no company is safe. Unfortunately, this does not look good for the sustainability of the industry.

---

About the Author

Neron Sifflore

Neron is an economics undergraduate at the university of Nottingham Malaysia Campus. He is very passionate about the subject and aspires to become the best version of himself. By joining the NES research team, Neron seeks to develop on a personal level and from an academic standpoint.

References

Who Is Sam Bankman-Fried? Available at Who Is Sam Bankman-Fried? – Forbes Advisor

Why Did FTX Collapse? Here’s What to Know. Available at Why Did FTX Collapse? Here’s What to Know. - The New York Times (nytimes.com)

Collapsed FTX owes nearly $3.1 billion to top 50 creditors. Available at Collapsed FTX owes nearly $3.1 billion to top 50 creditors | CNN Business

FTX Owes Its 50 Biggest Unsecured Creditors More Than $3 Billion. Available at FTX Owes Its 50 Biggest Unsecured Creditors More Than $3 Billion - Bloomberg

FTX’s Sam Bankman-Fried claims he only has $100K left in bank account (nypost). Available at Sam Bankman-Fried claims he only has $100K in bank account (nypost.com)