What Happened to FTX and How Does It Affect Other Crypto?

Kinnary Nensee Kinnary Nensee
Nov 17, 2022 5 min read
What Happened to FTX and How Does It Affect Other Crypto?

FTX is a cryptocurrency exchange that was founded in May 2019 by Sam Bankman-Fried and Gary Wang. It was built by the traders and for the traders. While it has its official headquarters in the Bahamas, FTX is managed from the US. Its biggest offices are located in Chicago and Miami.

FTX, along with its competitor, Binance, are international exchanges that process the majority of cryptocurrency trades around the world. Cryptocurrencies are, essentially, a publicly available blockchain that records ownership without the control of any central authority. Following this, FTX follows the bare minimum regulation that exists in the US. However, a bulk of its money flows through its books, unconstrained by regulatory requirements.

What Happened to FTX?
Future of FTX
After Effects on the Rest of the Crypto
The Aftermath of FTX Downfall

Comparison of Global Total Cryptocurrency Gains (2020–2021)
Comparison of Global Total Cryptocurrency Gains (2020–2021)

What Happened to FTX?

FTX’s own cryptocurrency is known as FTT. Sam Bankman-Fried, FTX’s co-founder, held billions of dollars' worth of its own cryptocurrency, FTT, through his other crypto hedge fund, Alameda. This was a claim that appeared in CoinDesk, a crypto industry news service. It also stated that Alameda had been using it as collateral in other loans. This news triggered a crisis, furthering the thought at, if this being the case, a fall in FTT’s value would damage both businesses because of their shared ownership. Further, it prompted questions and fears about the validity of the whole institution, as FTT itself has no value beyond FTX’s longstanding promise to buy any tokens at USD 22.

What added to the burgeoning fear was a tweet by Binance’s Chief Executive Changpeng Zhao which said that his company was selling its FTT holding worth approximately USD 500 million because of recent revelations about FTX. Following this announcement, the value of FTT collapsed and immediately the firm suffered a withdrawal surge as customers began withdrawing funds. Within a period of three days, users withdrew USD 6 billion in crypto tokens from FTX.

Within a couple of days, Changpeng Zhao of Binance announced that his company had reached an agreement to bail out FTX by buying the company with the condition that Binance has the discretion to pull out of the deal at any time. The very next day, Zhao announced that his firm was backing out of the deal. He said – β€œThe issues are beyond our control or ability to help.” Binance claimed that discovered discrepancies in the due diligence process, as well as the US, had launched regulatory investigations into FTX.

Future of FTX

According to Bloomberg, Bankman-Fried said his firm FTX, needed USD 4 billion to stay solvent with a funding gap of USD 8 billion. However, after Binance walked away from the potential distress deal, it is unlikely that FTX will find other backers.

Co-founder and Chairman of Coin Metrics, Nic Carter, said, "Sam needs to abandon his delusions of cobbling together some deal. There’s no one on earth that’s going to bail FTX out, unless the Fed is inclined to do it. It’s just not going to happen." If FTX folds, it could have a serious and long-lasting negative impact on individual investors, venture capitalists and even other crypto businesses.

Carter continues, "There are going to be big victims here. There will be a lot of innocent victims, not just individuals but also other firms like fintech firms, crypto firms that were providing access to end users. There is going to be some extremely tough knock-on effects."

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After Effects on the Rest of the Crypto

The immediate effect of the FTX crisis has caused bitcoin to plummet from USD 20k a coin to USD 16.5k a coin with the wider market falling 5% according to CoinMarketCap. Companies and protocols that have FTX exposure are proving their liquidity. If the FTX exchange fails and closes, there is no clarity on whether any of the bitcoin that function on that protocol would be retrievable. It could lead to a loss of millions of dollars, overnight.

The value of the entire crypto market is currently at USD 800 billion from the last year's November high of USD 3 trillion. The fall was the mixed result of crypto-specific events and macroeconomic issues. The industry, which has been struggling to convince regulators, investors and customers of its reliability and trustworthiness has suffered a setback that will take a long time to reverse if it does. The overall financial market is quite resilient to the ups and downs of the crypto market, which is a very insignificant systemic threat.

The Aftermath of FTX Downfall

Bitcoin Crashes as FTX Collapses

As unregulated as the crypto market currently is, this sudden collapse has triggered action and the rising concern of the need for a regulatory authority.

The Crackdown

Regulators are working towards freezing parts of FTX’s business, while other divisions file for insolvency or preparing for halting operations.

Scrutiny on Investors

Venture capital firms as well as investment funds which invested heavily in FTX are also facing inquiries.

Sponsorship Deals of Sports

FTX’s collapse has put sports sponsorships worth hundreds of millions of dollars at risk, right from the naming rights for an NBA arena to the patches on MLB Umpire’s uniforms.

Conclusion

Historically, cryptocurrencies have rebounded to new heights following every calamity. It seems to make other crypto ventures stronger. However, in the face of the current turmoil, investors might hold on to their crypto coins on exchanges for a much shorter period of time. They might also only use exchanges as transactional vehicles. The core principals of the other crypto ventures remain unchanged, as recent turmoil may represent a unique opportunity for bullish investors, but with different challenges. Time will tell.

FAQs

What is FTX?

FTX is a cryptocurrency exchange that was founded in May 2019 by Sam Bankman-Fried and Gary Wang. It was built by the traders and for the traders.

How did the FTX crisis affect bitcoin?

The immediate effect of the FTX crisis has caused bitcoin to plummet from USD 20k a coin to USD 16.5k a coin with the wider market falling 5% according to CoinMarketCap.

How much money did FTX need to stay solvent?

According to Bloomberg, Bankman-Fried said his firm FTX, needed USD 4 billion to stay solvent with a funding gap of USD 8 billion. However, after Binance walked away from the potential distress deal, it is unlikely that FTX will find other backers.

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