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In less than a week, a 30-year-old entrepreneur once hailed as modern-day JP Morgan has watched his digital empire, including billions of his own fortune, evaporate in a death spiral that has shaken the very foundations of the trillion-dollar crypto industry. .
On Thursday, Sam Bankman-Fried published a mea culpa: “I fucked it up,” he wrote. long twitter threadHe apologized to the investors and customers of FTX, the stock exchange platform he founded in 2019.
Failures are not uncommon in the complex, largely unregulated crypto world, but FTX is not your average crypto venture. This week’s collapse represents a potential turning point for an industry that many critics say has been allowed too long.
So what happened to FTX and why is the entire crypto world going crazy about it? There’s still a lot of uncertainty, but here’s what we know.
Last week, crypto news site CoinDesk published an article Based on a leaked financial document from Bankman-Fried’s hedge fund Alameda Research.
The report suggested that Alameda’s business rested on shaky financial foundations. That is, the majority of its assets are held in FTT, a digital token issued by Alameda’s sister firm FTX. This was a red flag for investors, as the companies were separate, at least on paper. However, Alameda’s disproportionate holding of the token showed that the two were much more closely linked.
On Sunday, the CEO of FTX’s much larger competitor, Binance, said: The company was liquidating $580 million worth of FTX shares. This started a bearish storm that FTX didn’t have the money to facilitate.
On Monday, concerns about Alameda and FTX had penetrated the broader crypto market. But Bankman-Fried took the challenge, tweeting that FTX and its assets were “good”. He also exchanged views with Binance CEO Changpeng Zhao, whose tweet boosted FTX deposits.
There was blatant animosity between the two, so the industry was shocked when the two announced a tentative deal on Tuesday. For Binance to save FTX.
“This afternoon FTX asked for our help,” tweeted Zhao. In the afternoon, he stated that the company has a “significant liquidity crunch” and that Binance needs to conduct institutional due diligence before making any deals.
Immediately after looking under the hood, Binance began to take a step back.
Meanwhile, Bankman-Fried’s personal fortunes plummeted. According to the Bloomberg Billionaire Index, Bankman-Fried’s net worth fell 94% in a single day, from $15 billion to just under $1 billion – the largest one-day loss by the index ever. (The estimate of his wealth was based on the assumption that Binance would eventually recover FTX, where most of Bankman-Fried’s personal assets were held. This means his net worth could drop further.)
On Wednesday, cryptocurrencies continued to decline as investor concern over the spread of the FTX bailout. Bitcoin and ether, the two most popular tokens, hit two-year lows.
Sales deepened after the media revealed that Binance was inclined to walk away from the deal. Of course, on Wednesday afternoon, Zhao tweeted a negative assessment of FTX’s problems:
“Initially, our hope was to support FTX clients in providing liquidity, but the issues are beyond our control or ability to help.”
It also addressed allegations of “misused funds” and investigations by US regulators.
Binance is out. FTX’s best chance for a lifeline was gone.
The full extent of FTX’s financial problems is not yet known, but multiple reports say the firm is facing an $8 billion deficit. Without a quick equity infusion, Bankman-Fried reported He told investors on Thursday that the firm was facing bankruptcy.
Since the Binance deal broke down, Bankman-Fried has been scrambling to raise funds. On Thursday, he tweeted that the firm had “several players” interviewed.
“We’re spending a week doing everything we can to increase liquidity,” he wrote in his apology message. “Every penny” of that, plus any remaining collateral, will go to integrating users, then investors and employees.”
Despite its reputation as a reliable, low-risk investment portal, FTX’s business appears to be built on a complex, highly risky form of leveraged trading.
Customers have invested their money to trade crypto. But it seems that FTX instead took billions of dollars of that money and lent it to sister firm Alameda to fund high-risk bets. According to The Wall Street Journal.
Bloomberg columnist Matt Levine put it another way: “FTX took customers’ money and traded it for a pile of magic beans, and now the beans are worthless.”
At the end of the day, FTX experienced the crypto equivalent of a classic bank run. Customers wanted their money and FTX didn’t have it.
In traditional finance, clients’ funds are protected by the Federal Deposit Insurance Corporation, which insures the deposits. The FDIC does not insure stocks or cryptocurrencies, but leaves the fate of FTX clients and investors at stake.
One of these investors was the Ontario Teachers’ Pension Plan, which it says has invested $95 million in both FTX International and its U.S. establishment “to make small-scale impact in an emerging space in the financial technology industry.” in a statement On Thursday, the plan noted that any loss on its investment would have “limited impact” as it represents less than 0.05% of its total net assets.
On Thursday, Bankman-Fried said Alameda Research will end trading and FTX will focus on emergency fundraising.
But after Binance, the largest exchange in the industry, has given up on bailing out its rival, FTX may have little choice.
In a note obtained by the New York Times, Bankman-Fried told staff that FTX was in talks with FTX. crypto entrepreneur Justin SunHe tweeted that he was working on “creating a solution” with FTX.
Meanwhile, US authorities, including the US Department of Justice and the Securities and Exchange Commission, are investigating FTX’s business, according to Bloomberg.
