FTX Crash: What Happened in the Crypto Market?
Crypto exchange FTX filed for bankruptcy on November 11, 2022. Over a 10-day period, the company’s valuation fell from $32 billion to bankrupt.
FTX’s collapse impacted the already volatile crypto market — which fell below $1 trillion in valuation — but seemed to leave the traditional financial markets unscathed.
- Previously one of the largest cryptocurrency exchanges, FTX, collapsed over the period of 10 days in November 2022.
- A report by CoinDesk that revealed potential leverage issues involving trading firm Alameda Research was the catalyst for FTX’s liquidity crisis.
- By November 11, CEO Sam Bankman-Fried stepped down and the company filed for bankruptcy.
FTX was one of the largest cryptocurrency exchanges in the world, handling more than 10% of derivatives traded every month.
CEO Sam Bankman-Fried, until recently the second-richest crypto billionaire, founded the company in 2018 at 28 years old. FTX differentiated itself from other crypto exchanges and businesses by positioning itself as pro-regulation and keeping positive relationships with traditional finance firms.
The FTX platform offers a wide range of products that are tradable on desktop and mobile apps. Crypto investors of all skill levels use its platform, as order types range from basic market orders to highly complex.
The company raised $1.5 billion in private funding in 2021, raising its valuation from $1.2 billion to $25 billion. An additional $500 million raise in early 2022 brought its valuation up to $32 billion. FTX gained a lot of support and buy-in early on, thanks in part to their efforts to establish credibility.
FTX has pursued a multi-million dollar marketing campaign that included celebrity sponsorships, naming sports arenas, a Larry David SuperBowl ad and sponsoring Formula 1 events. Deals included the naming rights to the Miami Heat’s stadium, the UC Berkeley football stadium and sponsoring Mercedes-AMG Petronas F1 Team.
About Sam Bankman-Fried
Sam Bankman-Fried (sometimes referred to as “SBF”) graduated from MIT then began a trading role at Jane Street Capital, a trading firm in New York. In 2017, Bankman-Fried left Jane Street and moved to Berkeley, California.
He worked briefly at the Centre for Effective Altruism as director of development. In November 2017, along with Tara Mac from the Centre of Effective Altruism he founded Alameda Research, a quantitative trading firm.
After attending a cryptocurrency conference in late 2018, he moved to Hong Kong and founded FTX in early 2019.
What is FTT?
FTT is the shorthand name for the FTX Token. It was created in 2019 and was valued as high as $80 earlier this year. In November 2022, there are almost 250 million FTX Tokens in circulation.
The FTX Token was less like a currency and more like a loyalty rewards program used to attract new buyers. Buying FTT gave customers access to execute trades on the FTX exchange at a discount. Tokens could also be used as collateral. It was like holding a VIP ticket to participate in the FTX ecosystem.
While this program was very profitable for the company, it ended up being the catalyst for its ultimate meltdown.
A Timeline of FTX’s Collapse
Prior to its collapse, FTX was a well-respected player in the crypto industry thanks to support from traditional financial giants like Blackrock as well as Bankman-Fried’s own experience in the industry.
November 2nd: CoinDesk Leaks FTX Balance Sheets
The FTX collapse happened in the span of 10 days in November 2022.
On November 2nd, CoinDesk reported on Alameda Research’s balance sheet, showing it held a $5 billion position in FTT. The company’s reliance on a currency its sister company invented as opposed to a fiat currency or separate cryptocurrency worried investors across the crypto world.
This started a domino effect that led to FTX’s eventual implosion. Alameda Research’s position in FTT raised concerns across the industry regarding the company’s undisclosed leverage and solvency.
For market dynamics to work properly, assets must be widely distributed. Instead, holders of FTT didn’t know that a lot of the asset was held by FTX and its affiliated companies, along with Alameda Research.
November 6th: Binance Exits FTT Position
When the news broke, investors wanted out quickly. The next domino to fall was Binance CEO Changpeng Zhao deciding to withdraw his company’s holdings of FTT. That scared FTX investors more, leading to panic selling, which tanked the token’s value.
November 7th: FTX Liquidity Crisis
After Binance’s decision to liquidate their FTT position, it only took a single day for FTX to experience a liquidity crisis. Customers had demanded withdrawals worth $6 billion immediately following CoinDesk’s article.
Bankman-Fried tried to reassure FTX customers through a series of tweets and turned to venture capitalist firms to find additional funds. When that was unsuccessful, Bankman-Fried asked Binance to bail them out.
November 8th: Binance Offers Bailout
At this point, the value of FTT had fallen by over 80% in two days. Binance announced on November 8th that they had reached a non-binding agreement to buy the US portion of FTX.
November 9th: Binance Cancels Bailout
Just one day after announcing the agreement, Binance said it would cancel the deal based on concerns about the mishandling of customer funds that were revealed during due diligence.
November 10th: FTX Assets are Frozen
On November 10, FTX Digital Markets, FTX’s Bahamian subsidiary, had all its assets frozen by the Bahamas securities regulator.
On the same day, the California Department of Financial Protection and Innovation announced it had begun investigating FTX.
Bankman-Fried returned to Twitter to apologize to customers, admitting that FTX’s non-US exchange had insufficient liquidity to meet customer demand.
Here, he acknowledged that there was a miscalculation of the company’s leverage and liquidity.
November 11th: FTX Files for Bankruptcy
On November 11, Sam Bankman-Fried stepped down as CEO of FTX. He was replaced by John J. Ray III, best known for leading Enron through bankruptcy proceedings.
FTX filed for Chapter 11 bankruptcy on the same day. The filings indicated that FTX had a 10:1 ratio of liabilities to assets.
November 11th: Apparent Hack of FTX Wallets
Within hours of filing for bankruptcy, FTX announced it was moving digital assets to cold wallets for security because of apparent “unauthorized transactions.”
Estimates put the amount stolen around $600 million.
What Does This Mean for the Future of the Crypto Market?
Financial experts have declared the crypto market dead numerous times before, but it has remained incredibly resilient.
This is in part due to the dogma of the industry. Most crypto traders are young men with high-risk appetites. The industry is built on a HODL (Hold on for Dear Life) mentality that keeps many invested even as asset values plummet.
For FTX, both international and US branches have frozen withdrawals. The company is currently under scrutiny from the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission for its handling of customer funds.
While the ultimate future of crypto is unclear, the future of FTX is in jeopardy and the ripple effects of this collapse have yet to fully be seen.
Impacts on Crypto Firms
Following FTX’s bankruptcy, a growing list of crypto firms has faced issues. Crypto lender BlockFI is considering filing for bankruptcy, according to the Wall Street Journal.
Crypto.com CEO Kris Marszalek suspended withdrawals of stablecoins USD and USDT on the Solana network, despite tweeting that the company’s direct exposure to the FTX crisis was “immaterial.”
Crypto hedge fund Galois Capital said roughly half of its capital is wound-up in FTX, according to the Financial Times. The Winklevoss twins halted withdrawals from their Gemini Earn crypto lending program. The list is still growing.
Impacts on the Broader Economy
One major concern for regulators with the crypto industry has been how enmeshed it is with traditional financial markets. In mid-November, it seems as though FTX’s collapse has remained isolated in the crypto industry as equity indexes remain stable.
The Bottom Line
In November 2022, major crypto exchange FTX rapidly collapsed following a CoinDesk report indicating the company was overleveraged and mishandling customer funds. The company filed for Chapter 11 bankruptcy after facing a liquidity crisis.
This crisis concerned many regulators who were already worried about the crypto and blockchain industries.
Future implications for FTX, crypto and the broader economy are ongoing and yet to be seen.