Reasons Why FTX Went Bankrupt

by Dec 5, 2022DEX/CEX, Hot Stories0 comments

This year has seen more than its share of market meltdowns due to surprising news about poorly managed crypto businesses. FTX, the world’s fourth-largest crypto exchange, is the newest seismic disturbance, considered an industry mainstay until early November. Let’s examine FTX bankruptcy reasons.

According to a corporate statement issued on Twitter, FTX, its sister business Alameda Research, and 130 linked entities operating under the brand of FTX Group filed for bankruptcy on November 11 due to a liquidity situation. In addition, FTX CEO Sam Bankman-Fried will step down and be replaced by John J. Ray III, according to the notice. Bankman-Fried, on the other hand, will be there to help with the transition.

“The temporary respite provided by Chapter 11 is appropriate to allow the FTX Group to review its circumstances and design a plan to optimize recovery for stakeholders,” said Ray, the new FTX CEO.

The FTX Bankruptcy Saga

The bankruptcy filing brought an end to a turbulent week for FTX bankruptcy reasons and Bankman-Fried.

The problem is centered on FTX’s native token, FTT, which has been crushed in a major sell-off. FTX sought to sell a significant portion of its running company to competitor Binance in a short chain of events that mainly transpired on Twitter after withdrawals threatened to bring FTX down. But, as soon as Binance provided its rescue plan in the form of an acquisition, the firm withdrew.

“As a result of corporate due diligence, as well as the current press reports about mismanaged client assets and suspected U.S. government investigations,” wrote Binance CEO Changpeng “CZ” Zhao in a November 9 tweet, only a day after providing FTX a bailout package.

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In response to Binance’s recent moves, Bankman-Fried stated in a November 10 tweet, “At some time, I may have more to say about a certain sparring partner, so to speak.” But you know what they say about glass homes. So, for the time being, I’ll say, “Well played; you won.”

In a matter of days, the multibillion-dollar cryptocurrency exchange fell from crypto leader to FTX bankruptcy reasons.

What Became of FTX?

FTX was valued at $32 billion just a few months ago. The MIT graduate is one of cryptocurrency’s most well-known individuals, a self-made young billionaire whose crypto empire previously included FTX and investment company Alameda Research.

Alameda Research’s objective was to offer liquidity on FTX. “Alameda’s incentive is simply for FTX to perform as well as possible,” Bankman-Fried tweeted when he started FTX in 2019.

Until recently, FTX has spared the liquidity crisis that struck crypto earlier in 2022, when a wave of contagion swept the market following the $60 billion collapse of stablecoin TerraUSD.

Bankman-Fried extended offers of emergency cash to crypto firms caught up in the chaos; just the way governments bailed out banks that were too large to fail during the 2008 financial crisis.

Bankman-Alameda, Fried’s styled as an altruistic superhero with the abbreviation SBF, came in as a lender of last resort to crypto enterprises such as Voyager Digital and Celsius, fell down the toilet, and threatened to take significant chunks of the crypto market with them.

The Trouble Started with FTX’s Token, FTT

Ironically, it looks like FTX was constructed on a similar house of cards to TerraUSD. FTX, like many other exchanges, had its own crypto coin, FTT, which was meant to help fund its numerous projects.

Owners of FTT might utilize the token to get discounts on FTX trading costs or to make money from their holdings by staking. It’s a typical strategy—for example, Binance provides two native tokens, Binance Coin and Binance USD.

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However, the way the token was utilized to support FTX rendered SBF’s empire very vulnerable to FTT volatility.

This week’s seismic occurrences are tied to a CoinDesk article published on November 2 that questioned FTX’s stability. According to CoinDesk, Alameda Research’s financial sheet was loaded with FTT.

According to reports, the single largest asset on Alameda’s $14.6 billion balance sheet as of June 30 was “unlocked FTT,” with a $2.16 billion pile of “FTT collateral” ranking third.

This implied that Alameda and FTX were not different firms and therefore exposed Alameda to FTT instability. That is the principal disadvantage of native tokens: they are virtually entirely uncontrolled and can quickly succumb to market losses.

FTT Contagion Moved Fast

The whale Alameda Research was not the only one having significant FTT holdings. Binance has a large stake in FTT as a result of a previous agreement with FTX. Binance sold its FTT holdings in response to the CoinDesk revelation, triggering a chain reaction.

“As part of Binance’s withdrawal from FTX equity last year, Binance earned around $2.1 billion USD equivalent in cash,” billionaire Zhao tweeted on November 6. (BUSD and FTT). We have chosen to liquidate any left FTT on our books as a result of recent developments.”

The tweet prompted a rush on FTT as well as a flight away from FTX. FTT peaked at $78 in September 2021, up from around $24 before Zhao’s infamous November 6 tweet, which sent it falling to its current trading price of less than $3.

“FTT was offset by the token’s falling value and the greater risk of total loss by continuing to keep it.” “FTT, like Terra/LUNA coins earlier this year, might become worthless in days,” argues Josh Peck, founder of TrueCode Capital.

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Binance’s Zhao significantly crippled FTX and his November 8 promise to save the struggling exchange vanished in less than 36 hours.

According to Bankman-Fried, there were around $6 billion in net withdrawals from FTX in the 72 hours before Zhao’s offer. However, after withdrawing from the bailout agreement, Binance ceased all withdrawals and new client onboarding.

The Downfall of a Billionaire

With a net worth of $16.4 billion, Zhao is one of the world’s richest people, while Bankman-Fried is no longer a member of the billionaire group.

Bankman-Fried dropped 94% to approximately $991.5 million in a single day, removing him from the Bloomberg Billionaires Index.

It’s a humbling moment for Bankman-Fried, who became a crypto mogul in a few short years with earnings that rivaled some of the world’s most successful investors.

Zhao has risen to the top of the cryptocurrency world this week.

Conclusion

The liquidity problem at FTX has poured kerosene on the cryptocurrency market, and contagion is spreading as crypto investors worry another shoe may drop.

Bitcoin (BTC) and Ethereum (ETH) have both lost more than 20% in the first week of November.

Other prominent cryptocurrencies are also down. The most notable is Solana (SOL), in which Bankman-Fried has a substantial investment. SOL fell by an astounding 51% during the first week of November.

“Solana liquidations are based on that FTX is a significant investment in SOL tokens and may liquidate the assets to avoid losses.” “However, it is uncertain to what degree this can impact Solana,” adds Miles Brooks, CoinLedger’s director of tax strategy.

SOL is a collateral asset that will most likely be liquidated when FTX/Alameda seeks to obtain capital.

And, while everyone assumed the FTX bankruptcy reasons were too big to fail, Brooks concludes that “no crypto enterprise is immune to the turmoil in the crypto market.”

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