FTX crash explained: How the crypto giant collapsed in a heartbeat

Whether you are a cryptocurrency enthusiast or someone who has never paid any attention to cryptocurrencies, you might have heard of FTX. The cryptocurrency exchange was a major success story in the crypto world until it shocked the crypto world by filing for bankruptcy, creating a rippling effect, pulling down the value of all other cryptocurrencies.

What is Cryptocurrency and FTX

Cryptocurrency is money traded in the digital form through cryptocurrency exchanges. Well-known examples of cryptocurrency include Bitcoin, Etheruem and Solana.

A picture of the well-known Bitcoin (Credit: Joao Castro/ Flickr)

FTX, owned by Sam Bankman-Fried, was one of the biggest exchanges focusing on cryptocurrency trading and it was praised for being one of the most transparent exchanges in the crypto industry.

The logo of FTX, reflected in an image of founder Sam Bankman-Fried (Credit: Stefani Reynolds/ Getty Images)

It was valued at an estimated $32 billion in January and you could find its name attached to NBA stadiums or in commercials featuring celebrities like Tom Brady and Larry David. 

However, that all disappeared when FTX  filed for bankruptcy and lost all its value and credibility as well as its CEO.

The bankruptcy filing

The crash started when CoinDesk, a digital currency news site, revealed Almeda Research – a trading firm founded by the owner of FTX, Sam Bankman-Fried – was heavily dependent on FTT, the token of FTX.

At the same time, the Wall Street Journal reported that FTX had lent millions of dollars of customers’ assets to Almeda to fund the firm.

“When the balance sheet was leaked, it was sort of like someone pulled the curtain and realised that the Wizard of Oz was not what we had thought,” Omid Malekan, an adjunct professor at Columbia Business School and crypto industry veteran, told USA Today. “It broke the illusion that this was this very high-flying, professional, very successful operation run by these young geniuses.” he added

After the report was published, the largest crypto exchange, Binance, said it would liquidate its FTT holding. This started a downward spiral with FTT and other cryptocurrencies as investors began to pull out their money, pulling down the value of FTT.

Binance had agreed to take over FTX in early November, but pulled out of the deal the day after, citing “corporate due diligence” and “news reports regarding mishandled customer funds and alleged US agency investigations”.

A photo illustration of the logo of Binance (Credit: Kanchanara/ Unsplash)

After the Binance ordeal, FTX officially declared bankruptcy and the CEO formally resigned from the cryptocurrency exchange. 

The effect of the FTX scandal

Reuters reports that at least $1 billion of customer funds are missing from FTX and that the Securities and Exchange Commission and Justice Department are investigating the exchange. 

Legal experts say FTX’s use of customer money for purposes not clearly communicated could be the basis for fraud or embezzlement charges. 

FTX is now accused of false representations and deceptive conduct and faces a class action lawsuit from U.S. crypto investors. Alongside the CEO of FTX, celebrities such as Stephen Curry, Tom Brady and Shaquielle O’neal who appeared in the commercials for FTX also face court appearances as defendants.

In light of the lawsuit, FTX has lost its naming rights to the NBA Miami Heat home arena in Miami and the formula one team, Mercedes has also ended its sponsorship deal with the exchange.

Effect on Cryptocurrencies

The scandal and bankruptcy of FTX has further disrupted confidence in the cryptocurrency market. Well-known cryptocurrencies such as Bitcoin and Ethereum have dropped significantly in value so far this year. The most famous currency, Bitcoin, has fallen about 65% so far while Etheruem has fallen by around 68%. 

Cryptocurrencies had already been having a bad year before the FTX scandal as the industry faced several bankruptcies. In August of 2022, CoinFlex, another cryptocurrency exchange, had declared bankruptcy after another scandal within the exchange. In September of the same year, cryptocurrency lender Celsius, had also applied for bankruptcy after the infamous Terra collapse.

Feature image by Maxim Hopman on Unsplash 

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