Crypto investors have endured more than their fair share of sudden market meltdowns this year thanks to shocking revelations about poorly managed crypto projects.
The latest seismic disruption is FTX—the fourth largest crypto exchange in the world—which until early November was considered to be an industry stalwart.
After facing a liquidity crunch, FTX, its sister firm Alameda Research and 130 affiliated companies under the banner of FTX Group filed for bankruptcy, according to a company statement posted on Twitter on Nov. 11. The statement also announced that Sam Bankman-Fried, CEO of FTX, would step down from his role and be replaced by John J. Ray III. However, Bankman-Fried will help with the transition.
“The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximize recoveries for stakeholders,” said Ray, the new FTX CEO.
The bankruptcy filing ended a tumultuous week for FTX and Bankman-Fried.
At the heart of the issue is FTX’s native token, FTT, which was eviscerated in a huge sell-off. In a rapid series of events that unfolded largely on Twitter, FTX attempted to sell a large part of its operating business to rival Binance after a wave of withdrawals threatened to take FTX down. But just as quickly as Binance offered its rescue package in the form of an acquisition, the company backed out.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” said Binance CEO Changpeng “CZ” Zhao in a Nov. 9 tweet, only a day after offering FTX a bail-out package.
In terms of the recent maneuvers by Binance, Bankman-Fried said in a Nov. 10 tweet, “At some point, I might have more to say about a particular sparring partner, so to speak. But you know, glass houses. So for now, all I’ll say is: Well played; you won.”
Within only a few days, the multibillion-dollar crypto exchange went from crypto leader to bankrupt.
“The FTX Group has valuable assets that can only be effectively administered in an organized, joint process. I want to ensure every employee, customer, creditor, contract party, stockholder, investor, governmental authority, and other stakeholder(s) that we are going to conduct this effort with diligence, thoroughness, and transparency,” the incoming FTX CEO said.
FTX was valued at $32 billion only a few months ago. The MIT grad is one of crypto’s most recognizable figures, a self-made young billionaire whose crypto empire once comprised of FTX and investing firm Alameda Research.
The purpose of Alameda Research was to act as a liquidity provider on FTX. In 2019, when Bankman-Fried launched FTX, he tweeted, “Alameda’s incentive is just for FTX to do as well as possible.”
Until now, FTX had managed to avoid the liquidity crisis that plagued crypto earlier in 2022 after a wave of contagion rocked the market in the wake of the $60 billion collapse of stablecoin TerraUSD.
Much like governments bailed out banks that were too big to fail during the 2008 financial crisis, Bankman-Fried extended offers of emergency liquidity to crypto companies caught up in the carnage.
Styled as an altruistic superhero with the acronym SBF, Bankman-Fried’s Alameda stepped in as a lender of last resort to crypto firms such as Voyager Digital and Celsius, went down the drain and threatened to take huge parts of the crypto market along with them.
Ironically, it appears that FTX was built on a house of cards not dissimilar to TerraUSD. Like many other exchanges, FTX supported its own crypto token, FTT, designed to support its various projects.
Owners of FTT could use the token to obtain discounts on trading FTX trading fees or for staking to earn income from their holdings. It’s not an uncommon strategy—Binance, for example, offers two native tokens, Binance Coin (BNB) and Binance USD (BUSD).
But how the token was used to support FTX left SBF’s empire incredibly over-exposed to volatility in FTT.
This week’s tectonic events are related to a Nov. 2 CoinDesk story that questioned FTX’s solvency. CoinDesk reported that Alameda Research’s balance sheet was stuffed with FTT.
Reportedly, as of June 30, the single biggest asset on Alameda’s $14.6 billion balance sheet was “unlocked FTT,” while the third biggest asset on the books was a $2.16 billion pile of “FTT collateral.”
This suggested that Alameda and FTX were anything but separate businesses, and it left Alameda wildly exposed to volatility in FTT. And that’s the big downside to native tokens: These types of crypto coins are almost completely unregulated and can rapidly fall prey to market losses.
Alameda Research wasn’t the only whale with big FTT holdings. Binance owned a sizable position in FTT, stemming from an earlier deal with FTX. Binance dumped its FTT holdings after the CoinDesk report, setting off the chain reaction.
On Nov. 6, Canadian-Chinese billionaire Zhao tweeted, “As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.”
The tweet precipitated a run on FTT and an exodus fr.om FTX. FTT peaked at $78 in September 2021, from around $24 before Zhao’s infamous Nov. 6 tweet sent it crashing to its current trading price of less than $3.
“FTT was outweighed by the declining value of the token and the increased likelihood of total loss by continuing to hold it. Much like the Terra/LUNA tokens earlier this year, it is possible for FTT to become valueless in days,” says Josh Peck, founder of TrueCode Capital.
Binance’s Zhao effectively kneecapped FTX, and his Nov. 8 offer of rescuing the troubled exchange evaporated in less than 36 hours.
Bankman-Fried told Reuters there was around $6 billion in net withdrawals from FTX in the 72-hour run-up before Zhao’s offer. But with Binance walking away from the bail-out deal, the company suspended any withdrawals and the onboarding of new customers.
While Zhao ranks among the world’s richest, with a net worth of $16.4 billion, Bankman-Fried is no longer a member of the billionaire’s club.
Bankman-Fried vanished from the Bloomberg Billionaires Index overnight, with his net wealth plummeting 94% to nearly $991.5 million in a single day.
It’s a humbling moment for Bankman-Fried, who became a crypto mogul after a few short years with earning comparisons that rivaled some of the most successful investors in the world.
As of this week, Zhao has become the No. 1 player in crypto.
FTX’s liquidity crisis has thrown kerosene on the crypto market, with contagion spreading as crypto investors fear another shoe will drop.
Over the course of the first week of November, Bitcoin (BTC) and Ethereum (ETH) have both dropped more than 20%.
Other leading altcoins are also down as well. Most notable among them is Solana (SOL), in which Bankman-Fried is a prominent backer. SOL fell a whopping 51% over the course of the first week of November.
“Liquidations in Solana are based on the fact that FTX is a big investor in SOL tokens and could dump the assets to mitigate losses. But the extent to which this can damage Solana is uncertain,” says Miles Brooks, director of tax strategy at CoinLedger.
SOL is a collateral asset and will likely be liquidated as FTX/Alameda looks to find a way to raise cash.
And while everyone thought the FTX was too big to fail, one thing is for certain, “no crypto firm is immune to the turbulence in the crypto sector,” Brooks summarizes.
