FTX’s bankruptcy continues to generate controversy. First, let’s take a step-by-step look at how all this bankruptcy happened. In this crisis there are two players. On the one hand, FTX, created by Sam Bankman Fried which was the second largest stock exchange in the world after Binance, and on the other hand, Alameda, a hedge fund also founded by Bankman Fried.
Alamanda was going through financial difficulties and Bankman Fried had used billions of dollars of client funds from FTX, its other platform, all of this went unnoticed by investors, employees and auditors.
How did this happen?
FTT token was used as collateral. The price of the token fell by 75% in one day, making the collateral insufficient to cover the trades.
Why is this point important? Because trading platforms must have enough funds to match what customers deposit. Thus, if many clients request to withdraw their cryptocurrency, i.e. their money, the platform will not have a problem, as it is covered. But this was not the case for FTX.
In this way, FTX reduces the amount of liquidity that needs to be available for withdrawal.
This situation has reached public opinion. Reports began leaking out about the critical condition of FTX accounts, and the link between the exchange and Alameda emerged. This caused panic in the investment community, which requested withdrawals from FTX amounting to about 6,000 million.
FTX could not handle those withdrawals and filed for bankruptcy. The cryptocurrency sector has collapsed. It was at this moment that Binance, the first cryptocurrency exchange and competitor of FTX, entered the scene, announcing that it would step in to save FTX. But this lasted a few hours, until Binance CEO Changpeng Zhao claimed too much risk and retracted his decision to intervene. This caused another crash in the cryptocurrency sector.
Pinkman Fried is resigning as CEO of FTX and Alamanda Research is closing operations.
Finally, FTX, which was worth $32 billion just a few weeks ago, is now worth zero.
Domino effect
This is not the first time this situation has happened: the Terra network collapse last May hurt several companies, including crypto platform Celcius and Chinese fund Three Arrows.
Now, after the FTX bankruptcy, two Asian stock exchanges, Pete Cook and Aax, have announced they are suspending withdrawals. For its part, Genesis has also halted cryptocurrency refunds for its customers.
Now it has come to our attention that another exchange, Blockfi, could file for bankruptcy soon because this lender had a lot of exposure to FTX, i.e. it had a lot of money there. There is also talk of two other cryptocurrency firms with funds in FTX, Sequoia and BlueFi.
The big question is what is happening now with the two giants of the sector, Binance and Coinbase (NASDAQ: COIN), and whether the domino effect will affect them as well.
What is the problem with all this? In my opinion, the massive loss of investor confidence in the cryptocurrency sector, which is a very risky sector and which, as we can see, can scare us a lot.
We have seen that Bitcoin, for example as the largest digital currency in the world, has gone from $69,000 just a year ago to $16,000 today. Some analysts believe that we may not have bottomed out and we could see $12,000 levels if this crisis continues.
the summary
I remember the same conclusion again: the cryptocurrency sector is very trendy, for better and for worse. You can make a lot of money in a short time, yes, right, but you can also lose it.
Cases like that of FTX remind us that strict regulation of the sector and a lot of transparency are essential, which is currently evident in their absence.