In less than a week, a 30-year-old entrepreneur once hailed as a modern-day JP Morgan saw his digital empire, including billions of his own fortune, evaporate in a deathly spiral that shook the foundations of the trillion dollar crypto industry. .
On Thursday, Sam Bankman-Fried posted a mea culpa: “I screwed up,” he wrote in a long twitter threadapologizing to investors and customers of FTX, the exchange he founded in 2019.
Failures are not uncommon in the murky and largely unregulated world of crypto, but FTX is not your average crypto startup. Its near-collapse this week represents a potential turning point for an industry that many critics say has been left behind for far too long.
So what happened to FTX, and why is the whole crypto space freaking out 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 hedge fund Alameda Research.
The report suggested that Alameda’s business rested on shaky financial foundations. Namely, most of its assets are held in FTT, a digital token created by Alameda’s sister company, FTX. It was a wake-up call for investors, as the companies were, at least on paper, separated. Alameda’s disproportionate holdings of the token, however, suggested the two were much more closely linked.
On Sunday, the CEO of Binance, FTX’s biggest rival, said his the company was liquidating $580 million worth of FTX holdings. This sparked a storm of levies that FTX did not have the money to facilitate.
On Monday, concerns about Alameda and FTX had spread to the broader crypto market. But Bankman-Fried was defiant, tweeting that FTX and its assets were doing “good.” He also tussled with Binance CEO Changpeng Zhao, whose tweet fueled the FTX deposit rush.
There was clearly bad blood between the two, which is why it shocked the industry when the pair announced a tentative deal on Tuesday. for Binance to bail out FTX.
“This afternoon, FTX asked for our help,” Zhao tweeted. afternoon, noting that there was a “significant liquidity crisis” in the business and that Binance should conduct due diligence on the business before moving forward with any deal.
Almost immediately after peeking under the hood, Binance began to backtrack.
Meanwhile, Bankman-Fried’s personal fortunes also plummeted. According to the Bloomberg Billionaire Index, Bankman-Fried’s net worth plummeted 94% in a single day, from over $15 billion to just under $1 billion – the biggest one-day loss ever. by the index. (His wealth estimate was based on the assumption that Binance would eventually bail out FTX, where much of Bankman-Fried’s personal assets are held. Meaning his net worth could drop further.)
On Wednesday, cryptocurrencies continued to tumble as investor concern over the FTX bailout spread. Bitcoin and ether, the two most popular tokens, both hit two-year lows.
The selloff intensified after media reports that Binance was leaning towards pulling out of the deal. Sure enough, on Wednesday afternoon, Zhao tweeted a withering assessment of FTX’s troubles:
“At first, our hope was to be able to help FTX customers provide liquidity, but issues are beyond our control or our ability to help.”
He also alluded to allegations of “mismanaged funds” and investigations by US regulators.
Binance was out. FTX’s best hit on a lifeline was gone.
The extent of FTX’s financial problems is not yet known, but multiple reports indicate that the company is facing an $8 billion shortfall. Without a quick injection of equity, Bankman-Fried would have told investors on Thursday that the company was at risk of bankruptcy.
Since the Binance deal collapsed, Bankman-Fried has been scrambling to raise funds. On Thursday tweeted that there were “a number of players” the firm was in talks with.
“We are spending the week doing everything we can to increase cash flow,” he wrote in his apology thread. “Every penny” of that, plus the remaining collateral, will go towards making whole users, followed by investors and employees.
Despite its reputation as a reliable, low-risk investment portal, FTX’s business appears to have been built on a complex and extremely risky type of leveraged trading.
Clients deposited their money to engage in crypto trading. But it appears FTX instead took billions of dollars of that money and loaned it to its sister company, Alameda, to fund these high-risk bets, according to the Wall Street Journal.
Bloomberg columnist Matt Levine put it another way: “FTX took their customers’ money and traded it for a bunch of magic beans, and now the beans are worthless.”
In the end, FTX experienced the crypto equivalent of a classic bank run. Customers wanted their money, and FTX didn’t get it.
In traditional finance, customer funds are protected by the Federal Deposit Insurance Corporation, which insures the deposits. The FDIC does not insure stocks or cryptocurrencies, however, leaving the fate of FTX clients and investors in question.
One such investor was the Ontario Teachers’ Pension Plan, which said it invested $95 million in both FTX International and its U.S. entity “to gain exposure on a small scale to an emerging area of the fintech industry”. In a statement on Thursday, the scheme noted that any loss on its investment would have a “limited impact” as it represents less than 0.05% of its total net assets.
On Thursday, Bankman-Fried said Alameda Research would wind down operations while FTX would focus on emergency fundraising.
But after Binance, the industry’s biggest exchange, balked at saving its rival, FTX may have few options.
Bankman-Fried told staff in a memo obtained by The New York Times that FTX had held talks with crypto entrepreneur Justin Sun, who tweeted that he was working on “setting up a solution” with FTX.
Meanwhile, US authorities, including the US Department of Justice and the Securities and Exchange Commission, are investigating FTX’s activities, according to Bloomberg.
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