The FTX Crash Explained

 

Unless you’ve been living under a rock, you would have seen the overwhelmingly large number of headlines about the FTX crash. Figures and opinions are being bounced between the financial sector and crypto giants. To cut through all the noise, here’s our breakdown of how it all began and what it means for the future of crypto

 

Founded in 2019, FTX rose to fame through several high-profile acquisitions, unique marketing strategies and low trading fees. FTX attracted people who weren’t familiar with the crypto world, promising they could nest their money in accounts and earn significantly higher returns than traditional banks. Almost $2 billion was invested into the company by venture capital banks and Sam Bankman-Fried became the face of FTX and to many, crypto culture. With celebrity endorsements, viral tweets and a series of interviews expressing his altruistic nature, he became a figure hard to miss.

 

First red flags

FTX’s financial success was a hot topic of discussion amongst the finance sector, with little understanding of how exactly the king of crypto was achieving this immense wealth. He was the founder of both FTX and Alameda Research which should have had divisions in place between them. But earlier this month, news outlets had started to report that a large portion of Alameda’s assets were a type of crypto released by FTX itself. A few days later, headlines came out sharing that FTX had been loaning customer assets to Alameda for high-risk trades without the knowledge of customers.

 

Virtual bank run

Panic started to seep in and large crypto investors like FTX’s competitor Binance began to sell off cryptocurrency on FTX’s exchange. FTX was unable to meet customer withdrawals and was left with no choice but to halt trading. The company had built up assets which it wasn’t able to access in the long term, and liabilities which could be instantly accessed. Despite FTX being technically solvent and maybe having enough assets to cover all the money it owed, it was highly illiquid, so it couldn’t get to those assets

 

Bankruptcy

FTX, Alameda Research and 130 other affiliated companies founded by Bankman-Fried filed for bankruptcy. This leaves more than a million suppliers, employees and investors who bought cryptocurrencies through the exchange or invested in these companies with potentially no way to get their money back

 

Aftermath 

FTX has claimed to owe around $1.45bn to its top 10 creditors. As a result, Bitcoin has fallen by 25% and has sunk below $13,500 as investors sprint to stable ground. Questions are beginning to rise around the stability of crypto. Once viewed as one of the steadiest firms in the sector, fears are now festering on the legitimacy of the industry. Venture capitalists are going to be reluctant before they invest in the next big crypto project and consequently mainstream institutions are now unlikely to become involved in the sector.   

 

Should Crypto continue?

The question of Crypto’s survival has been in debate since the crash but a more important question has emerged from the discussion: should crypto continue? The traditional finance sector has been scrutinising crypto regulations for years, but few rules have been put in place, and the regulations that have been implemented in the U.S are unclear. One of the reasons why FTX was able to get away with their mismanagement was because they were operating in the Bahamas, a country with little regulatory oversight. The crash could have been prevented with better regulations in place, but some economists argue that cryptocurrencies are too high risk to be properly managed. The bank of England disagrees and insist that tougher regulations are needed before a bigger crypto shock can have a greater destabilising impact.