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FTX – rise and fall of a cryptocurrency giant

FTX, valued at $32 billion in January 2022 and deemed the second largest crypto exchange in the world at one point of time, seems on the verge of a collapse. When the crypto winter intensified in May 2022, FTX had a hefty war chest full of cash and went on an acquisition spree. Today, FTX is insolvent and on the brink.. It may very well be the ‘Lehman Brothers’ moment for cryptocurrency.

The CEO - Sam Bankman-Fried’s (popularly called SBF) net-worth has taken a nose-dive in a single daydropping to $1billion from an initial $15 billion. So, what exactly led to the precarious moment that left FTX as well as all its investors reeling? Let’s find out.

SBF’s empire can be broken down into 2 arms – the crypto exchange FTX and trading firm Alameda Research. On Wednesday, 2nd November 2022, crypto news service CoinDesk published an article claiming that of the $14.6 billion in assets Alameda Research held $3.66 billion worth of “unlocked FTT.” Moreover, it had $2.16 billion worth of “FTT collateral.” This means that it held $5.82 billion worth of FTT in total.

The catch? FTT is the native token of FTX. And the sum paid to keep Alameda afloat was in fact custodian assets that should have otherwise been untouched. What’s more is that Alameda was using this stockpile of FTT as collateral to secure its own loans. This meant that any freefall in the value of FTT would deal a devastating blow to FTX as well.

Here’s something interesting – FTT derives its value from FTX’s promise to buy any token for $22, and that’s about it.

On Sunday, 6th November 2022, Binance, the largest exchange in the world, announced that it would liquidate any FTT left on its books “due to recent revelations.” This liquidation was to the tune of $500 million, and the effect was almost instant.

The crypto market immediately responded with traders scrambling to dissociate themselves from FTX by liquidating all their FTT immediately. Normally, FTX processes tens of millions of dollars on a daily basis. But total investor withdrawals amounted to as much as $6 billion over a period of 3 days. FTX struggled to pay exiting investors as there was no way to source so much money in one go.

On Tuesday, 8th November 2022, Binance announced that it planned to acquire FTX in the moment of crisis and that it would perform its due diligence over the next few days. SBF tried to assuage panicked investors revealing that all assets would be covered 1:1 and that the customers were protected. But the declaration was too early.

Binance discovered gaping holes in FTX books while carrying out corporate due diligence. On Thursday, 10th November 2022, the exchange announced that it would no longer pursue the FTX acquisition anymore. According to Bloomberg, there is currently an $8 billion shortfall in covering up for the mass-withdrawal. Parallelly, FTX investor Sequoia Capital has marked down its $214 million investment in FTX to zero.

This series of developments has caught the attention of regulators like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). FTX is being investigated for misappropriation of customer funds as well as its connection with other arms of SBF’s crypto empire.

It is a well-known fact that cryptocurrencies are still quite loosely regulated across the globe. The lack of stringent oversight warrants the need for a way to mitigate the underlying counterparty risk for businesses as well as individuals. While it is true that investors must carry out their own research before deploying their hard-earned money into an asset, it is also true that some laws are required to protect customers and hold the perpetrators accountable for losses caused.

Sources:

  1. ftx: Crypto giant FTX ready with billions of dollars for acquisitions - The Economic Times (indiatimes.com)
  2. Exclusive: Behind FTX's fall, battling billionaires and a failed bid to save crypto | Reuters
  3. What Happened to FTX? Here’s What to Know. - The New York Times (nytimes.com)
  4. CZ 🔶 Binance on Twitter: "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 came to light, we have decided to liquidate any remaining FTT on our books. 1/4" / Twitter
  5. CZ 🔶 Binance on Twitter: "This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days." / Twitter
  6. Binance on Twitter: "As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f." / Twitter
  7. Sam Bankman-Fried’s FTX Faces $8 Billion Shortfall, Possible Bankruptcy - Bloomberg
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