FTX collapse: what went wrong?

FTX, the world’s third-largest cryptocurrency exchange (at the time), saw a rapid and catastrophic financial demise. From boasting a staggering valuation of $32 billion, the company plummeted into bankruptcy overnight, leaving millions of businesses and individuals in dire straits.

At the centre of this harrowing tale is Sam Bankman-Fried, the enigmatic founder and CEO of FTX, who once held the status of ‘billionaire’ and is now facing the grim consequences of his actions. This article looks into the dramatic collapse of FTX, shedding light on the events that led to its downfall, the role of key players like Sam Bankman-Fried and Changpeng Zhao, and the far-reaching aftermath of what has been described as one of the most significant frauds in U.S. history.

Who is Sam Bankman-Fried?

Sam Bankman-Fried, the founder and CEO of FTX, as well as the brain behind hedge fund Alameda Research, is an American entrepreneur, investor, and former billionaire who gained notoriety for his astute trading strategies. According to several online sources, Bankman-Fried garnered attention by purchasing Bitcoin at a low price in the U.S. and skillfully selling it for a higher price in Japan.

Why did FTX collapse?

FTX (The Exchange) had a token called FTT. One crucial aspect of FTX’s downfall revolves around its native token, FTT. The FTT token, while associated with the FTX trading platform, lacked any substantial utility and was created seemingly out of thin air. It did not represent ownership in the company nor offer any tangible value or benefits beyond reduced trading fees. Essentially, FTT was a token without a true purpose, yet it played a significant role in the events leading to FTX’s collapse. The absence of genuine utility for FTT raised concerns about the overall stability and credibility of the exchange, contributing to the devastating outcome that unfolded.

Between May and June 2022, Bankman-Fried’s trading firm, Alameda Research, suffered a series of losses, including a $500-million loan agreement with failed crypto lender Voyager Digital

Seeking to prop up Alameda, which held almost $15 billion in assets, Bankman-Fried transferred at least $6 billion of FTX funds, secured by assets including FTT and shares in the trading platform Robinhood.

Alameda used these funds by putting up FTT tokens as collateral for customer deposits, despite the fact that these tokens had no real tangible backing.

In November 2022, financial information about Alameda Research was leaked, revealing potentially concerning connections between Sam Bankman-Fried’s two companies. CoinDesk↗︎ detailed a leaked balance sheet that allegedly showed that much of Alameda’s $15 billion in assets were actually held in FTT.

Binance and Changpeng Zhao

Changpeng Zhao, the founder of the number one crypto exchange in the world by trading volume, Binance, had invested in FTX in its early days but later decided to divest his stake. In 2021, he cashed out his equity in return for a $2.1 billion payout. Crucially, part of this payout was denominated in FTT.

In November, rumours circulated that FTX could face insolvency, leading Zhao to hint on Twitter that Binance was contemplating selling off all its FTT tokens. Citing new information regarding FTX’s alleged lobbying activities against other crypto industry companies, Zhao informed his 7 million followers that he had decided to dispose of Binance’s FTT holdings.

FTX’s demise

It was widely anticipated that the news of Zhao’s decision to sell his FTT tokens would cause the price of FTT to plummet. As a result, many people began to panic sell their FTT tokens, causing the price to rapidly sink and the FTX token became worthless overnight.

All of the money borrowed from FTX had been lost and Bankman-Fried had no option but to halt customer withdrawals, which led to mass panic. FTX no longer had the means to honour customer withdrawals.

In a desperate attempt to save FTX from financial ruin, Bankman-Fried contacted Zhao and pleaded with him to purchase FTX to help its customers. Initially, FTX had a non-binding agreement for Binance to acquire FTX, but after Zhao reviewed FTX’s books, he decided not to follow through with the acquisition and FTX was forced to file for bankruptcy.

The aftermath

As a consequence of the bankruptcy, it is unlikely that anyone who had money invested in FTX will ever see a penny. More than a million businesses and individuals are owed money following FTX’s collapse.

As for Sam Bankman-Fried, the man who was formerly worth $15 billion, has now lost all of his wealth and is facing years in prison.

The FTX collapse has been described as one of the biggest frauds in US history.