The FTX bankruptcy has recently made headlines in the crypto industry and broader news landscape. It has caused a significant stir for good reason. FTX Exchange, one of the largest cryptocurrency exchanges globally, filed for bankruptcy, leaving investors shocked. In this article, we will delve into the factors that led to FTX’s downfall and what it means for the future of the cryptocurrency market.
To fully understand the FTX bankruptcy, we must first trace the rise of both FTX Exchange and its parent company, Alameda Research. Alameda Research, founded by CEO Sam Bankman-Fried and CTO Gary Wang, is a quantitative trading firm. In May 2019, FTX Exchange was launched by Alameda Research. FTX positioned itself as a crypto derivatives platform, allowing traders to access popular cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP). This strategy catapulted FTX to become one of the largest cryptocurrency exchanges globally, with over one million users as of July 2021. FTX’s popularity was expected to grow further as the firm pursued aggressive marketing and introduced new features like the FTX Token (FTT). The FTX Token (FTT) was created by the firm to incentivize customers with trading discounts and other benefits. Speculators purchased the token with the belief that its value would increase as FTX gained more popularity. The FTX Token (FTT) also had a burn mechanism, in which the founders were anticipated to gradually reduce its supply over time, further bolstering its value.
FTX and Alameda Research’s rapid rise was primarily due to efficient marketing and smooth capital raising. During the crypto bull run in 2021 and early 2022, capital investments were readily available. As one of the leading crypto derivatives platforms, FTX took advantage of this by raising hundreds of millions in venture capital. Prominent investors, such as Sequoia Capital, engaged in careless investing during this frenzied period. SBF’s public image and effective altruism also played a role in attracting more investors to FTX. His modest lifestyle and apparent concern for animals and the environment resonated with people. Consequently, FTX and Alameda Research reached the top of the cryptocurrency exchange rankings.
Sam Bankman-Fried is the CEO and founder of FTX Exchange. He entered the cryptocurrency trading space in 2017 during Bitcoin’s dramatic surge to $20,000. Before founding FTX, Bankman-Fried had already experienced success as an entrepreneur and investor through the establishment of Alameda Research in 2017. The main factor that propelled Bankman-Fried’s success was arbitraging the inefficiencies across different crypto exchanges. Recognizing the price discrepancies, he bought Bitcoin at the lowest price on one exchange and sold it at the highest on another, generating substantial profits. While questions remain regarding his initial capital, Bankman-Fried’s early success as a trader paved the way for FTX’s establishment in 2019.
In 2022, FTX made significant strides toward mainstream appeal by sponsoring renowned athletes like Tom Brady and securing naming rights for the Miami sports arena, rebranding it as FTX Arena. As a centralized exchange, FTX provided users with the ability to trade FTX tokens (FTT) and other cryptocurrencies. Its centralized nature allowed for swift decision-making and implementation in the market. FTX also offered a wide range of trading options, including futures contracts, options, and perpetual swaps, which leveraged users’ trades and amplified potential returns. The combination of these factors attracted many casual crypto traders to FTX, resulting in exponential growth in its user base. Unfortunately, this growth led to significant losses for depositors when FTX ultimately filed for bankruptcy.
FTX and Alameda Research capitalized on the failures of other major crypto players through strategic acquisitions. Their leverage in the crypto markets allowed them to offer solutions that other companies couldn’t. For instance, FTX secured a deal with BlockFi, providing a $400 million revolving credit facility and an option to acquire BlockFi for $240 million. However, FTX eventually faced bankruptcy, just a few months after acquiring BlockFi, as its parent company also succumbed to insolvency. Initially praised for “saving” BlockFi, SBF and FTX’s health were overlooked by media outlets. As a private corporation, FTX was not obligated to release financial statements, enabling it to maintain the appearance of security while expanding rapidly. The collapse of insolvent entities became inevitable, as FTX failed to fulfill its promise of safety due to a lack of liquidity.
The catalyst that sealed FTX’s fate was a leak of its balance sheet, which revealed its insolvency. Upon discovering this, Binance founder CZ threatened to liquidate all of its holdings in FTX Token (FTT). This revelation emerged in early November, and those informed had only a few weeks to withdraw their funds from FTX before the platform was officially shut down in December 2022. Binance had acquired a considerable amount of FTX Token (FTT) through previous dealings with FTX’s founder. CZ acted swiftly, effectively dismantling FTX.