FTX and this crazy crypto week

Last week was one of the craziest in cryptocurrency history. If you’ve been under a rock, you may not have heard that FTX, the second-largest crypto exchange, has collapsed. The news of its insolvency spread quickly, worsening the fear and uncertainty already plaguing the market. The FTX cryptocurrency market collapse sent panic throughout the industry.

Many crypto holders feared for their funds. A wave of withdrawals began on other exchanges, triggered by a possible domino effect, which is common in the crypto industry. This raised questions about the safety of exchanges, especially Crypto.com. Many exchanges provided proof of their liquid assets to reassure their communities.

Solana was one of the hardest-hit cryptocurrencies. The Solana Foundation held 134.54 million SRM tokens and 3.43 million FTT tokens on FTX, valued at $190 million before FTX froze withdrawals on Nov. 6. Additionally, FTX held many millions in Solana tokens, which it had to sell to meet withdrawal demands. The shock from the FTX collapse hit Solana hard, causing its token value to drop by 57% in a week. The FTT token, a key part of the FTX ecosystem, lost over 95% of its value.

How did FTX, the second biggest exchange, become insolvent?

In case you didn’t know, there was a long ongoing crypto drama between CZ, the CEO of Binance, and SBF, who is the CEO of FTX. Binance initially invested in FTX when the latter was founded. Later on, FTX bought back Binance’s stake for $2 billion in BUSD and FTT tokens as a move to become more independent from the worldwide number-one exchange.

There was a lot of tension and growing rivalry between the two CEOs and the drama was only beginning. SBF then started to fund anti-Binance articles that were heavily criticizing the platform and spreading misinformation to media and even attacked CZ’s children. SBF also had a lot of Washington and Wall Street connections and started lobbying regulators in the United States against Binance.

Then a company co-founded by SBF named Alameda, which does market making, yield farming and other magic internet money-related services, saw one of their balance sheet research leaked. FTX and Alameda are considered by many to be one entity which makes them very related. The leaked balance sheet showed alarming numbers concerning the company’s financial situation, with many illiquid altcoins and mainly locked FTT tokens.

Moreover, the market for FTT tokens was fragile and only $1 million of selling pressure could significantly move the FTT price lower, as pointed out by Dylan Le Clair, a senior analyst. Knowing that Alameda was using the locked FTT tokens as loans collateral, they would be obliged to sell some of their assets to avoid facing margin calls and, eventually, assets’ liquidation.

Binance CEO CZ’s Tweet Sparks FTX Collapse

This information was quite interesting to CZ, who was unhappy with SBF’s unethical competition. CZ later posted a tweet that shook the market. He said, “Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support, but we won’t pretend to make love after divorce. We are not against anyone, but we won’t support people who lobby against other industry players behind their backs. Onwards.”

The FUD (fear, uncertainty, and doubt) reached serious levels. Many big crypto players began shorting FTT tokens after Caroline Ellison, CEO of Alameda, tweeted: “@Cz_binance if you’re looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!” This tweet confirmed the dangerous financial situation of Alameda and FTX. It triggered a bank run, as people feared the exchange wouldn’t have enough liquidity for withdrawals.

Sam Bankman-Fried (SBF) stepped down as FTX’s CEO in the days after the withdrawal freeze. FTX and over 130 affiliated companies filed for bankruptcy. Some hoped for a recovery, especially after Binance initially offered to buy FTX. However, Binance quickly backed out when the full extent of FTX’s financial situation became clear.

SBF stepped down and John Jay Ray III took over as the new CEO. He was the person who oversaw the Enron scandal. Meanwhile, hackers breached the FTX platform, draining around $1 billion to external wallets. Many believe the breach was an inside job.

Final thoughts

In conclusion, this major crypto event offers a valuable lesson. The FTX cryptocurrency market collapse highlights the risks of holding funds on centralized exchanges. You can never be 100% sure that your funds are safe.

Investing in a cold wallet is a safer option. A cold wallet is a physical device that securely stores your cryptocurrencies offline. It can help you avoid situations like this in the future. Always stay informed about the latest news regarding the exchanges and cryptocurrencies you use. Early awareness has helped many FTX users protect their funds. Before learning to do this, you need to know what to follow to understand the latest Crypto and NFT trends. Stay safe and DYOR!

 

Author: Sviatoslav Pinchuk, COO of TradeCrypto is a crypto journalist who simply bought some BTC for domestic needs in 2014 and then forgot about it till 2017. He got Etherium in 2017 by misclick and sold it in 2018 “just to try”. After losing 1 Florida house on XEM in 2018, Sviatoslav finally decided to trade reasonably. He is one of the most analytical and data-driven traders in the crypto industry.