A week is a long time in crypto. Last week, FTX was the third-largest cryptocurrency exchange in the world valued at US$32 billion. Its co-founder and CEO, Sam Bankman-Fried, appeared on magazine covers and was heralded as the “next Warren Buffett”.
Now, the company is bankrupt. Customers and investors have lost billions. Sports teams and arenas sponsored by FTX have scraped their signs from their courts and fields. Regulators — including ASIC — are taking a long hard look to see if crimes have been committed. Bankman-Fried is reportedly “under supervision” by authorities in the Bahamas where the company was registered. And the entire crypto market is in meltdown.
When all is said and done, FTX’s implosion is set to rank among the greatest corporate collapses in history for both its scale and speed.
What happened to FTX?
FTX was founded in 2019 by Bankman-Fried and Gary Wang out of an existing trading firm, Alameda Research. It was a cryptocurrency exchange — a company that allows customers to trade in their real money for different cryptocurrencies. Exchanges typically make their money through transaction fees; when a customer turns Australian dollars into bitcoin, the exchange takes a cut.
It took off. The company’s revenue increased tenfold from 2020 to 2021, reporting US$1.02 billion in 2021 and US$270 million in the first quarter of 2022. Bankman-Fried had earned a reputation as a safe, stable hand in an industry of cowboys who had pushed for regulation in the industry. His Good Samaritan image extended to promising to buy other failing cryptocurrency exchanges to protect the market.
The thread that led to this all unravelling was FTT, a cryptocurrency created by FTX that granted owners discounts when using the cryptocurrency exchange. Launched in 2019 along with the exchange, the token’s value — which peaked with a US$9.7 billion market cap — became an indicator of the value of the exchange itself.
During the early days of 2022, Bankman-Fried’s Alameda Research suffered significant losses, Reuters reports, leading FTX to transfer $4 billion to the firm — including customer funds — borrowed against assets including FTT tokens. When CoinDesk published leaked financials of Alameda Research earlier this month, they showed the majority of Alameda’s assets were FTX’s own currency. (There are a lot of reasons why it’s perilous to hold a lot of a token closely related to the company’s own value, including issues with liquidity and fears that having wrong-way risk could kick off a “death spiral”).
On November 7, the CEO of competitor Binance (and former investor with a complicated history) Changpeng Zhao was likely referring to this report when he declared that his company was going to sell all of their FTT “due to recent revelations that have come to light”.
This sudden announcement sent the token’s price tumbling and people rushed to withdraw their money from FTX — reportedly US$6 billion in crypto tokens in 72 hours, up from a daily average of tens of millions. Meanwhile, both FTX and Alameda were holding FTT, which was worth less and less.
Eventually, Bankman-Fried reached out to Zhao, asking him to buy FTX so they could survive the liquidity crunch. Zhao agreed at first, announcing the deal, before pulling out after seeing the state of FTX’s books.
Less than 10 days after the leaked financials and five days after Zhao’s tweet, FTX filed for bankruptcy and Bankman-Fried resigned.
The aftermath of FTX’s collapse
By the end, FTX reportedly held US$900 million in liquid assets versus US$9 billion of liabilities. A spreadsheet listing the assets showed US$5 billion withdrawn a week ago and a negative US$8 billion entry that Bankman-Fried said he’d “accidentally” extended to Alameda.
Remarkably, the drama doesn’t end there. On Friday night in America, hundreds of millions of dollars were moved from FTX’s cryptocurrency wallets (equivalent to a self-held, public bank account) and a message from the company was posted on social media that claimed it had been hacked, like scavengers picking at a corpse.
Beyond the big investors who lost money, FTX’s sudden bankruptcy has hurt a lot of customers with funds held in the exchange; the company’s bankruptcy statement lists more than 100,000 creditors and the company claimed to have more than a million customers. While exchanges might vaguely operate like a bank — you give them money, they hold it, you (hopefully) withdraw it at some point — they come with none of the protections. These people have little recourse.
Former US Treasury secretary Lawrence Summers compared the company’s collapse and reports of potential fraud with Enron. Fittingly, the comparisons don’t just end there. The companies share a mission statement — “built by traders for traders” — and FTX’s new CEO is the lawyer who led the disgraced energy company through bankruptcy proceedings.
FTX’s collapse is the cherry on top of an already disastrous 2022 for cryptocurrency. The failures of big crypto players against the backdrop of worsening economic conditions mean that crypto’s “winter” looks to only get worse. Even as industry survivors promise to improve governance and transparency to stop something like FTX from happening again, regaining consumer trust will be a tall order.
Even if a punter can make money in crypto, they’ll think, what’s the chance they’ll ever see it?
