A rather unfortunate event replaced this week’s spotlight aimed at the midterms: FTX announced bankruptcy. The crypto industry was shocked to the core as CEO Sam Bankman Fried revealed that one of the largest digital asset exchanges became illiquid.
The market survived many tragedies this year: Luna, 3AC, Celsius, and many others. But as if things couldn’t get any worse, the community was met with an event the likes of which we haven’t seen since the fall of Mt. Gox. The market crashed, people lost life savings unable to withdraw, and the bar for trust dropped ever so low.
What led to FTX’s blow up and how did it happen? Get a drink, sit down, and read about crypto’s most recent tragedy.
Something Is Rotten In the State of FTX
It’s November 6th and Bitcoin trades at $21,200. Binance CEO Changpeng Zhao posts a tweet saying his exchange is liquidating its stake in FTT following a controversial CoinDesk report. The report revealed that FTX’s sister company Alameda Research had most of its capital locked up in FTT – the utility token of the former.
Alameda had $14.6 billion worth of assets as of June 30 per the report. However, a large portion of it was in FTT. Alameda Research is a crypto trading firm that has incredibly close ties with FTX. The fact that most of its liquidity was held in a token printed out of thin air by the very same owner was alarming to say the least.
CZ’s tweet has caused panic among the Crypto Twitter community. Many flocked to FTX to instantly withdraw their funds, expecting that the exchange might not be as liquid as many believe. This turn of events led to a bank-run that snowballed into something far worse.
Zhao sought to remove his company’s stake in FTT while simultaneously minimizing market impact. Alameda CEO Caroline Ellison responded to this prompt by offering to buy Binance’s stake at market prices via an OTC deal. She also claimed that Alameda had another $10 billion that weren’t found in the leaked balanced sheet.
A battle of giants begins as Alameda sells its Solana (SOL) assets in order to push FTT’s price above $22, while Binance sells FTT to buy its native BNB token. Investors who smelled something was foul quickly increased the pace at which they were withdrawing, causing even more panic.
Sam Bankman Fried issued a series of (now deleted) tweets within the first 24 hours in an attempt to calm down tensions. He claimed that FTX (and its assets) are fine. Sam also stated that the exchange had enough capital to cover all client’s funds and that a competitor is stirring up false rumours.
However, it took Sam less than a day to admit defeat and offer Binance a deal. Zhao offered to acquire FTX in an effort to save investors from fraud, keep the industry’s reputation from falling into an abyss, and prevent the market from crashing. The deal was in the making and Zhao stated he had the discretion to pull back from the deal.
The most baffling part of the story is that almost no one in the company was aware about the real state of FTX except Sam. “We’re chugging along…Obviously, Binance is trying to go after us. So be it,” Sam wrote to his employees on Slack following the surge in withdrawals.
By the time things were set in stone, the young billionaire disclosed the Binance deal to his company. According to a source from Reuters, even the executives were shocked and were unaware that the withdrawal situation was so critical.
The Crypto Twitter community went through all 5 stages of grief as Sam finally admitted defeat. Rage became the most prominent emotion once everything simmered down. No one could believe that Sam Bankman Fried, an icon of the industry and favorite among investors, had betrayed the trust of his community.
And how could the community not be full of anger? Those who withdrew on time were saved. Meanwhile, investors who still had money locked up on FTX had their capital forever lost as the exchange did not have the money required to cover their client’s funds.
All hope was placed on Changpeng Zhao accepting the deal. In the true spirit of crypto, the absolutely worst outcome occurred.
Zhao Declines Deal, Insanity Ensues
Following a gruesome 24 hours of waiting on Zhao’s response, Binance announced that it would not go ahead with the acquisition deal. FTX had $8 billion missing on its balance sheet and had awaited a new US probe from regulators. The dollar cost required to save FTX from its downfall and protect investors was simply too much.
What followed soon after was a monumental crash. Bitcoin dropped down to $15,700, Ethereum to $1,076, and Solana to $13. Bitcoin had crashed to its lowest point in 2022, a level not visited since 2020. Altcoins were most deeply affected due to their low liquidity and exposure on FTX. Coins such as SOL, RAY, FTT, and others were the most affected as FTX had large exposure to them.
FTX revealed that it would have to announce bankruptcy unless it raised funds. The exchange supposedly plans to raise funds next week in order to make things right for investors. But the question still stands: who would want to bail out FTX if even the strongest exchange refused to do so?
Zhao came out as the ultimate winner of the crypto exchange battle royale, but at what cost? Investors lost money, the crash attracted the attention of regulators, and the market as a whole suffered a damaging blow to its reputation that will take years to recover.
Why Did FTX Fail?
FTX had a total valuation of $32 billion at the start of the year. It is backed by many reputable investors such as BlackRock and SoftBank. FTX was considered to be one of the more well-managed entities in the crypto market. The exchange went as far as to offer bailing out Celsius, BlockFi, and Voyager Digital.
For bailing out other crypto companies, Bankman-Fried earned the title of “the J.P. Morgan of Crypto.” Sam played an important role in containing the crypto contagion following the LUNA and 3AC crash. The CEO also spread his wings to TradFi by buying a stake in retail broker Robinhood, showcasing he’s an unstoppable player.
Bankman-Fried frequently supported regulators as well. He interacted quite a few times with several key figures in the U.S. regulatory jurisdiction. In fact, the billionaire was criticized for trying to regulate the industry too much.
Sam’s moves seem bold following FTX’s crash. It seems that he tried to maintain a sense of stability while his exchange and trading firm were failing. And due to the recency of these events, not much is known about how the exchange met financial doom.
Speculations lead us to believe that Sam overextended too much, or that he lost much more than we were left to believe earlier this year following LUNA’s and 3AC’s collapses. Some within the community also propose that the exchange exposed itself too much to Web3 and DeFi platforms – most of which lost a majority of their users during the bear market.
In a Twitter thread earlier today Sam claimed that the exchange still had capital to recover user funds. But if that is the case, why did FTX have difficulties processing user withdrawals in the first place? Something stinks, and it isn’t the smell from the crypto market burning.
Justin Sun: The Wildcard
There was no plan B if Zhao rejected the deal. But lo’ and behold, a wildcard appeared at the very last moment: Justin Sun. Tron’s eccentric founder tweeted that he and his team are putting together a solution to not only save Tron holders on FTX, but all investors as well.
Sam Bank-man Fried apparently held talks with Justin Sun for a potential – which should take place next week. Not much is known about the deal itself and many question Sun’s ability to cover FTX’s $8 billion hole in its balance sheet.
The more likely outcome is that Sun will raise funds for FTX together with other investors and crypto entities. The coming days will show whether that scenario is possible. Sam’s latest comments poured a little light on that possibility:
“There are a number of players who we are in talks with, LOIs, term sheets, etc. We'll see how that ends up.”
This is a developing story. We will update the article as FTX and other crypto entities reveal new information.
About The Author:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.