The latest events in cryptocurrency reverberated throughout the global financial community in the biggest way possible. Futures Exchange or FTX has now filed for Chapter 11 bankruptcy protection in the U.S. This was declared by John J. Ray III — the CEO who took over from Sam Bankman-Fried’s helm. SBF — as Sam Bankman-Fried is also popularly referred to — will still stay on to assist with the transition. There are a total of 130 affiliated companies with FTX that will also be taking part in the bankruptcy proceedings that also includes SBF’s Alameda Research and FTX.us
FTX’s downfall dragged all of its celebrity endorsers into the situation. Among the famous promoters of FTX are Larry David, Tom Brady, Giselle Bündchen, Shaquille O’Neal, Stephen Curry, and others.
OFFICIAL STATEMENT ON TWITTER
SFX was first established in 2019. Its considerably short story created a heady success in its early years in the market. SBF was able to establish FTX as the largest cryptocurrency platform. But the illusion can be sustained for only so long. SBF has since lost 94% of his personal wealth in a single day. Currently, it’s unclear where the former FTX CEO is now since his USD 40 million Bahamas penthouse is up for sale.
Sorting through FTX history
The year 2017 saw the foundation of FTX. SBF noticed something unusual on the page of CoinMarketCap.com listing the price of bitcoin on exchanges around the world. At that time one can see a 60% difference in price on the value of the coin. Following his instinct, SBF started buying bitcoin on one exchange and selling it back on another exchange thereby earning a profit equivalent to the price spread.
SBF grabbed this arbitrage opportunity and focused on South Korea where the exchange-listed price of bitcoin was significantly more than in other countries. This goes down in history as the Kimchi Swap or Kimchi Premium that brought SBF on the map of cryptocurrency.
He stayed on this wave for a month until he was able to establish Alameda Research where he was able to scale the Kimchi Premium and work on this full-time that saw the firm earn as much as a million dollars a day.
The Bitcoin arbitrage was not an easy feat to do. This meant setting up connections to each one of the trading platforms. It also involved building out other complicated infrastructures to abstract away a lot of the operational aspects of making the trade. Having control on all points of trade, SBC was able to increase the value of his company as well as its revenue exponentially.
FTX was then launched in the spring of 2019 to complement Alameda’s services. SBF’s personal wealth peaked at over USD16 billion in March while FTX had a USD2 billion venture fund that also founded other crypto firms.
The FTX logo was seen everywhere, with sponsorships and stakes in special events such as the Formula 1 race cars to a Miami basketball arena. SBF became the it-boy for cryptocurrency’s lucrative investments and went on numerous press tours to promote FTX. He was also one of the Democratic Party’s top donors, pledging USD1 billion into the U.S. political races but reneged on this later on.
Last year’s tipping point
Alameda began taking out too many loans for various reasons and purposes that also included making venture investments. They continuously overstepped on the funds they have on hand and would need to recover from errors or impulsive buy-ins that went haywire.
When the first wave of the crypto companies that closed six months ago happened, the depressed prices of the cryptocurrencies plunged down and removed liquidity from the market. The first one to get affected was Stablecoin or terraUSD due to a project failing and with this its sister token Luna went down, too — taking USD60 billion in losses. Their collapse brought down Three Arrows Capital or 3AC which was among the respected crypto hedge funds. Crypto brokers and lenders such as Voyager Digital and Celsius also collapsed for they were heavily invested in 3AC.
Cracks behind the illusion
The cryptocurrency prices were still doing down but SBF claimed that FTX was immune to the effects of the market trend. In reality, this did affect both Alameda and FTX as much as it did the other cryptocurrency platforms.
Loans were layering upon one another and getting this so-called leverage to pump more funds into the downward trending cryptocurrency market will not get the situation in a better light. Having loans worked when the market was at its peak but by June, bitcoin and ether had slid to more than half their value for the year.
Hart Lambur, former Goldman Sachs government bond trader who provided liquidity in US Treasuries for the central bank, money managers and hedge funds, expressed his outlook on how things are, “Leverage is the source of every implosion in financial institutions, both traditional and crypto, Lehman Brothers, Bear Stearns, Long-Term Capital, Three Arrows Capital and now FTX all blew up due to bad leverage that got sniffed out and exploited by the market.”
Alameda created the “immune” status of FTX by scrambling to get loans to compensate for the failing digital asset firms in the spring and summer. When this wasn’t becoming sufficient enough in the long term, Alameda tapped into FTX customers’ deposits to stave off margin calls and meet debt obligations as well.
When the dominoes started falling
The cycle of endlessly juggling funds, payments, obligations, deadlines and market expectations was a futile effort for Bankman-Fried. By June, he tried to bail out some of the failing crypto firms but it was all too late. SBF also tried to buy the affected companies as well as extend the financing in multimillion-dollar loans.
The borrowing and lending scheme between the two firms, Alameda and FTX, was very complicated and opaquely running behind the scenes. FTX even went as far as creating a token, FTX Token (FTT) — a team-up with Serum — to use in financial filings. FTT’s value is highly speculative, largely unregulated and very susceptible to market downturns. Firms can freely make up their own cryptocurrency all the time. The strong market perception of FTT got investors’ confidence in the meantime and kept FTX afloat in an illusionary cloud of stability.
Pressures in the market, insider knowledge and the seemingly unstoppable downward spiral of cryptocurrencies created a hair-trigger atmosphere. Despite this, Changpeng Zhao — CEO of Binance and a long-time colleague of SBF stepped in to help in 2019. Binance announced a strategic investment in FTX and said that as part of the deal it had taken “a long-term position in the FTX Token (FTT) to help enable sustainable growth of the FTX ecosystem.”
The 6th of November: The end begins
A brief respite, a bit of a breathing room ran from 2019 until November 6th of 2022.
Puzzlingly, Bankman-Fried was pressing regulators to look into Binance and was also criticizing the exchange in public.
As soon as this happened, Binance CEO Changpeng Zhao, known as CZ, struck back.
When CoinDesk reported that there was a leaked balance sheet (November 2) that showed Alameda’s assets were held in FTX’s illiquid FTT token — this raised concerns and questions on FTX’s true financial state and stability.
By the sixth of November, CZ commented on Twitter that his company, Binance had USD 2.1 billion of FTT and Binance USD (BUSD), its own stablecoin. Along with the bomb:
“Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” he said.
This triggered a race to pull any money out of FTX. On the same day that CZ’s tweet was posted, FTX saw USD5 billion in withdrawals — the largest seen on record. This also underscores how the largely unregulated crypto market is often operating in an information vacuum. The extremely reactionary market is both a boon and a bane for cryptocurrencies.
Fabian Astic, head of decentralized finance and digital assets for Moody’s Investors Service, opined,
“Crypto players are reacting quicker to news and rumour, which in turn builds up a liquidity crisis much faster than one would have seen in traditional finance. The opacity of the market operations often leads to panic reactions that, in turn, spark a liquidity crunch. The developments with Celsius, Three Arrows, Voyager, and FTX show how easy it is for crypto investors to lose confidence, prompting them to withdraw large sums and causing a near-death crisis for these firms,” Astic said.
SBF sought investors to cover the multibillion-dollar hole left by Alameda that went up to as high as USD10 billion. All declined. This prompted him to make a desperate move to go to CZ for help.
CZ’s next tweet spelled the end for FTX. On Nov. 8 he tweeted that Binance agreed to buy the company but with the condition that this is nonbinding. The sudden exposure that FTX needed to be bailed out caused FTT’s value to plunge nosedive even further.
By the 9th of November, CZ backed out of the deal — finding that with due diligence, he didn’t like what he saw at FTX. This has SBF publicly speculating that CZ never intended to buy it in the first place.
On Friday, Nov. 11, FTX and Alameda both filed for bankruptcy. From USD 32 billion in value earlier in 2022, it fell so fast in a matter of days to chapter 11. The latest bankruptcy filing saw more than 1 million creditors. It plans to file a list of the 50 largest ones this week.
FTX will be busy talking to regulators in the US as well as overseas, the US Attorney’s office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Moving forward, the SEC and Department of Justice are reportedly investigating FTX for civil and criminal violations of securities laws. There will be financial regulators in the Bahamas who will be looking at the possibility of criminal misconduct.
Binance: The next best thing?
The dramatic and breathtaking speed of events of the past weeks now sees Binance as the biggest cryptocurrency platform in the world. FTX’s fall can pave the way for better policies, transparency and timely lessons learned to prevent yet another fall in the cryptocurrency platforms.
William Quigley, the co-founder of the U.S. dollar-pegged stablecoin tether, expresses, “Binance clearly comes out stronger from all of this. CZ claims Binance has no debt and doesn’t use its BNB token as collateral. Both of those are good practices in the highly volatile crypto markets — more institutional trading and custody will likely shift to Binance.”
From Clara Medalie, director of research at data firm Kaiko, “The cryptocurrency industry’s entire ethos is founded on disintermediation and decentralization, so Binance’s ever-growing dominance raises reasonable fears over how further centralization will affect the average trader. FTX’s collapse benefits no one, not even Binance, which will now face growing questions over its monopoly of market activity. Each entity has numerous twisted and overlapping financial ties to projects throughout the industry that now stand to lose support or go under themselves,” she said.
CZ’s latest tweet, “Full disclosure. Binance never shorted FTT. We still have a bag of as we stopped selling FTT after SBF called me. Very expensive call.”
Any reactions, feedback, or opinions on the death of FTX? We look forward to hearing from you. For me, this simply shows the importance of transparency when it comes to cryptocurrency exchanges and platforms. It will help stave off unfounded guesswork as well as orchestrated maneuvers to establish an illusion detrimental to the market. Hope to hear from you soon!