Within 48 hours FTX, the second largest crypto exchange in the world went from 100 to nearly zero real quick.
Wait, how did we get here?
First, some history lesson. In November 2017, Sam Bankman-Fried (SBF) founded the hedge fund Alameda Research, and two years later he founded FTX, a crypto exchange.
FTX, which became the more popular entity of the two benefited from the 2021 bull run, rising to become the second largest exchange in the world, overtaking the likes of Coinbase, Kraken and Gemini.
Uhun…
On November 2, CoinDesk reported that Alameda’s balance sheet was disproportionately filled with FTT tokens, dropping a hint that FTX and Alameda Research were more closely intertwined than many had thought. According to CoinDesk, $5.8 billion of Alameda’s total assets ($14.6 billion) were held in illiquid FTT collateral that had a market cap of ~$3.35 billion.
Now the issue with this is that FTT tokens aren’t an independent asset like fiat currency (Dollars, Pounds, Rand) or another crypto, they were invented by FTX, a sister company to Alameda.
On November 6, Binance CEO CZ, who was displeased with SBF’s stand on crypto regulation of crypto, announced on Twitter that he’ll sell off the $2.1 billion worth of FTT Binance had. Binance was an early investor in FTX, but when FTX grew fast and the two exchanges became competitors, they parted ways with Binance being given back its stake in $2.1 billion worth of FTT.
This move by CZ coupled with rumours going around caused a panic. Sellers were selling FTT but nobody wanted to buy the token, causing the price of FTT to spiral down.
The price of FTT crashed drastically from $24 to $2 as at the time of writing this newsletter. A year ago FTT tokens were worth $60.
And…
At the brink of collapse, SBF reached out to CZ to help out. Binance initially agreed to buy FTX (with the option to pull out if it didn’t), but later pulled out. Apparently, the damage was more than Binance could take on.
So in a nutshell, here’s what went wrong.
FTX is a crypto exchange, not a bank. People buy and sell cryptocurrencies, and many people store them on FTX for ease of use. FTX loaned $10 billion out of $16 billion of those cryptocurrency deposited on its exchange to its hedge fund, Alameda, which in turn made bets using those customer funds and ended up losing about $8 billion.
The word got out, people came knocking for their funds in droves. There wasn’t enough to go around.
What’s next? FTX, FTX group (130 affiliated companies), and Alameda Research have all begun filing for bankruptcy. Samuel Bankman-Fried has stepped down as CEO.
Regulators are looking into the situation and asking questions.
