FTX Collapse

FTX was one of the world’s largest cryptocurrency exchanges with a $32 billion valuation at its peak and collapsed over a 10-day period in November 2022. The company filed for bankruptcy and its founder, Sam Bankman-Fried, faced criminal charges. The collapse resulted in the loss of $8 billion in funds, affecting over one million customers.

Prior to the collapse, founder Sam Bankman-Fried was one the fastest-rising stars and entrepreneurs in crypto. His businesses consisted of Alameda Research, a trading firm, and FTX, a cryptocurrency exchange.

The collapse started with an article by crypto publication CoinDesk that highlighted solvency concerns with Alameda Research’s balance sheet. The report revealed that Alameda held more than a third of its assets in FTT, FTX’s native token.

The news of the intermingling assets ricocheted across the crypto ecosystem, causing alarm among investors and journalists. A series of events in quick succession led to the revelation of a large hole in FTX’s balance sheet and the exchange being unable to support customer withdrawals. As the crisis deepened, FTX eventually disabled customers’ access to their funds and halted exchange operations.

The collapse of FTX and subsequent bankruptcy had significant effects on the crypto market, leading to billions in losses and sending the market into turmoil.

FTX Background

FTX was founded in 2019 by Bankman-Fried and his partner, Gary Wang. The exchange was enormously successful – a year after its launch, it was valued at $1 billion USD, and three years later, its valuation was $32 billion. At the start of 2022, the exchange had over one million users and boasted several celebrity endorsements and sports sponsorships.

Alameda Research was founded two years prior in 2017, also by Bankman-Fried and Wang. The firm focused on arbitrage trading, which exploits the price differences between identical assets in different markets by buying at a lower price from one exchange and selling it higher at another.

The two ventures made Bankman-Fried one of the richest people in crypto with a net worth of $16 billion, mostly comprising ownership of FTX stock and FTT tokens. His tremendous wealth and swift rise to fame made him a crypto celebrity and one of the most influential figures in the digital asset community.

Sequence of Events

CoinDesk article

On November 2, 2022, an article by CoinDesk revealed that Alameda held a large amount of FTT tokens, the native token of FTX, comprising more than a third of its $16 billion balance sheet. The crypto community took note of the intermingling of funds, concluding that trouble for one business meant major problems for the other.

The CoinDesk article notes:

“While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. The situation adds to evidence that the ties between FTX and Alameda are unusually close.”

Bank run on FTX

On November 6, Changpeng Zhao (CZ), the CEO of the Binance crypto exchange, announced that the company would sell all of its 23 million FTT tokens, amounting to $529 million dollars, causing FTT’s price to drop sharply.

As the price plummeted, FTX customers ran to withdraw their funds from the exchange. Although Bankman-Fried tried to reassure investors that the exchange was stable, FTX saw an incredible $6 billion in withdrawals over 72 hours.

Had FTX held customer assets 1-for-1, this run would not have resulted in a collapse. Instead, FTX was allegedly trading customer funds instead of holding them 1-for-1 in custody.

Further, it appears that FTX extended Alameda Research with a near-infinite credit line, which the trading firm allegedly defaulted on. Due to the connected nature of the two firms, FTX sold customer funds to keep Alameda afloat, which contributed to the collapse of the exchange when customers rushed to withdraw their assets.

Proposed acquisition

Bankman-Fried turned to outside capital to keep FTX afloat. On November 8, Binance announced that it reached a tentative agreement to buy FTX for an undisclosed amount. However, the company pulled out of the deal the next day after the corporate due diligence found multiple issues including the mishandling of customer funds and pending investigations.

Bankruptcy and criminal charges

On November 9, FTX’s website reported that it was not processing withdrawals at that time. Two days later, Bankman-Fried stepped down as CEO and the companies filed for Chapter 11 bankruptcy.

In December, US prosecutors charged Bankman-Fried with eight criminal charges including money laundering, wire fraud, and securities fraud. Four additional charges for financial crimes were announced in February 2023.

Alleged hack

Hours after filing for bankruptcy, FTX reported “unauthorized transactions” withdrawing funds from the exchange and that they would move assets into cold storage. Analysts suspected that up to $477 million was stolen in the hack.

Effects of the collapse

Described by federal prosecutors as "one of the biggest financial frauds in American history,” the FTX collapse had a profound effect on the cryptocurrency market. As the saga unfolded in early November, the Tether stablecoin dropped from its $1 USD peg to $.97 and Bitcoin plummeted to its lowest level in two years. Cronos, the exchange token of crypto.com, lost $1 billion in value. The collapse prompted withdrawals at other crypto exchanges and share prices for public digital asset companies declined.

BlockFi, a digital asset lender that had significant exposure to FTX, and several other crypto companies associated with FTX filed for bankruptcy, owing debt to many creditors.

The consequences of FTX’s collapse continued into 2023. Spurred by a fall in crypto prices, Silvergate Bank, which provided banking services to crypto customers, discontinued its operations and liquidated in March 2023.

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FTX collapse essentials

• FTX was one of the largest crypto exchanges in the world before collapsing in spectacular fashion over the course of 10 days in November 2022.
• The collapse resulted in a loss of $8 billion in customer funds and destabilized the broader crypto market.
• FTX founder Sam Bankman-Fried, once one of the wealthiest and well-known figures in crypto, is facing criminal charges relating to the collapse.