The cryptocurrency market just witnessed its very own Lehman Brothers moment. The world’s second-biggest cryptocurrency exchange blew up! But what went wrong for FTX? The simple answer is Over leverage and mishandling Customer funds.
The plot starts with Alameda Research. Alameda was founded in 2017 by Sam Bankman-Fried as a private trading business experimenting with cryptocurrency.
They made money by purchasing and trading cryptocurrency and made a lot of it.
Sam soon realized he wanted more. He didn’t want to only trade cryptocurrency but also to assist others in doing the same.
FYI: He did not want to support everyone at first. Only major institutional investors are eligible.
So he created an exchange — FTX (in 2019).
After that everything is going smoothly and they raised $1B from Softbank and others in the latest series C funding round and the company was valued at $32 billion.
And the Drama Begins!
It all started with CoinDesk’s report on 2Nov, it claims a big hole in Alameda Research’s balance sheet which has a significant number of illiquid FTT tokens.
Side note: FTT is the native token of FTX change.
This news caused panic in the market and the announcement of CZ (founder of Binance) selling the FTT token in the free market acted like fuel to fire, causing a huge price impact on the FTT price.
After this Alameda started selling their assets to defend the price of the FTT token, but it was too late to protect.
Alameda starts selling Solana, as both the company has strong allies,
leading Solana bleeds in the crypto market.
SBF Twitter Post
Sam described FTX as “good,” adding that “FTX has enough to support all customer holdings.
“ We do not invest (in) customer funds (even in treasuries). We have been and will continue to process all withdrawals.”
He noted that FTX was extensively regulated, even if the restrictions slowed it down, and that the crypto exchange has GAAP audits, over $1 billion in cash reserves, and a lengthy history of protecting customer funds.
FYI: The original tweet is deleted.
In this whole tantrum, investors run to take out their funds from the exchange but FTX stops the withdrawal due to the liquidity crunch, causing panic in the market.
Binance and FTX Deal
Bankman-Fried made the shocking revelation on November 8 that FTX has “came to an agreement on a strategic transaction” with Binance for the exchange to assist address what he called a “liquidity crunch.”
He went on to say that “all assets would be covered 1:1,” which was the major reason FTX urged Binance to step in.
Soon after, Zhao said that Binance had inked a nonbinding letter of intent to purchase the exchange, but that they maintained the right to “back out of the agreement at any moment.”
More Panic to the Market!
SBF_FTX removed his critical Twitter thread late on Nov. 8, merely hours after announcing the transaction with Binance. Where he states that FTX and its assets were “fine.”
The websites for FTX Ventures and Alameda were taken offline on November 9, while unsubstantiated allegations surfaced that FTX’s legal and compliance employees departed on November 8.
This event triggered the market and caused huge liquidation in Solana.
Binance Step Out from the Deal
Binance declared on Nov. 9 that it will not be pursuing the purchase of FTX, less than 48 hours after Zhao first said that Binance could move to acquire FTX.
Following a review of the organization’s structure and financial records, Binance withdrew, it said in a statement to The Wall Street Journal.
Binance Statement: https://twitter.com/binance/status/1590449161069268992
This caused a blood bath in the crypto market, leading bitcoin to make new lows in the year 2022.
SBF reaching out to Other potential investors
Sam Bankman-Fried allegedly sought investors for more than $10 billion in immediate capital to fill a gap caused by a surge in withdrawal requests to his cryptocurrency exchange in current days.
The CEO requested a call on Nov. 9 in which he highlighted methods to alleviate FTX’s financial issues.
FTX, a cryptocurrency exchange, may be forced to declare bankruptcy if it does not acquire additional cash, according to founder and CEO Sam Bankman-Fried, who officially informed investors on Nov 9.
The Wall Street Journal published the same amount, emphasizing that FTX needs a financial infusion to satisfy consumer withdrawal requests.
SBF Recent Tweet
SBF finally appeared in front of the public since rumors and fears about FTX’s insolvency swamped the crypto market.
According to his latest tweet, on 10 Nov Thursday, he “could have done more” in giving transparency on the issue with FTX.
CEO said his priority is the users, second the old and new investors, and third the employees.
link to his tweet: https://twitter.com/SBF_FTX/status/1590709197502812160
After mishandling billions of dollars of Users, FTX filed for Chapter 11 bankruptcy in the United States.
So now = FTX US, FTX, and Alameda Research are Bankructed and SBF resigned as CEO.
Now user's funds are gone and it created a blood bath in the whole crypto market.
Never keep your funds in a Centralized Exchange.