Case Study: What happened to #FTX?

The world’s second largest cryptocurrency exchange is suffering a severe crisis, which may spill over to the rest of the crypto market. What actually happened to FTX, could the management prevent this, and what effect will it have on the industry — in our case study.

Short facts about FTX

  • FTX is a cryptocurrency exchange with a headquarter in the Bahamas. It is managed from the US, with its biggest offices in Chicago and Miami.
  • FTX was founded in 2019, and had over one million users at its peak in 2021.
  • The exchange is run by Sam Bankman-Fried, nicknamed the “King Of Crypto”, who is its CEO and founder.
  • Sam Bankman-Fried also owns a crypto hedge fund Alameda.
  • The native token of FTX is FTT, and it appeared to be the real troublemaker.

What went wrong?

In the beginning of November 2022, CoinDesk reported on a leaked document that showed that the hedge fund Alameda held an unusually large amount of FTT tokens worth $5.1 billion. It revealed suspicious close financial ties between FTX and Alameda that were meant to be separate businesses.

Soon after the publication, Binance, the largest crypto exchange, announced that it would sell its FTT tokens worth about $500m “due to recent revelations.” The value of FTT rapidly collapsed, and FTX customers started withdrawing funds.

FTX now was to complete withdrawals, which amounted to nearly $6 billion over three days. The exchange entered a liquidity crunch, meaning it lacked the money to fulfill requests.

What’s the matter with Binance?

Binance first decided to bail out FTX, saying it had reached an agreement to buy the company. But later CZ, Binance’s CEO, announced it would no longer buy FTX, referring to a “result of corporate due diligence.” He also cited regulatory investigations and reports of mishandled funds.

What was next?

The assets of FTX were frozen by the Bahamas securities regulator, while Bankman-Fried was seeking up to $8 billion to bail out the exchange. On the same day, Californian authorities initiated an investigation on FTX.

Bankman-Fried apologized for the liquidity crisis, admitting that FTX had insufficient funds to meet customer demands. Bankman-Fried said that “poor internal labeling” caused FTX to miscalculate leverage and liquidity. He left his post as CEO and filed for bankruptcy protection.

Within hours of filing for bankruptcy, FTX claimed it became a victim of “unauthorized transactions.” Some analysts also said they suspect that $477 million was stolen from FTX in the suspected hack.

FTX’s future and effects on the market

As of today, FTX is unable to process withdrawals, and strongly advises against depositing. The exchange’s future is in serious jeopardy. In addition, it has lost customers’ trust and raised security and liquidity among investors. The FTX crisis is the largest collapse in the short history of crypto.

This collapse has already affected the rest of the market: Bitcoin has plummeted from $20K to $16.5K, its lowest value since 2020. Many other coins lost their value too, in addition to the ongoing crypto crash.

FTX was not the first crypto exchange to collapse, though. But it probably was the largest and most trusted platform to fail as badly. It’s expected that traders and investors will be more cautious, but won’t pull out of crypto on the whole.