This week, FTX – one of the biggest centralised exchanges in the crypto industry – collapsed. The crypto markets have reacted accordingly resulting in multi-year lows for many digital assets.
To wrap our heads around the FTX collapse and subsequent fallout, which continues to unravel at the time of writing, let’s take a closer look at the two companies most central to the story; FTX and it’s trading arm, Alameda Research.
Both FTX and Alameda Research were founded by Sam Bankman-Fried (aka SBF), an MIT physics graduate, who spent his early career working as a trader. While trading traditional markets, SBF identified the opportunities that cryptocurrencies presented. In an effort to take advantage of these opportunities he and his friend, Gary Wang, set up Alameda Research.
Alameda Research famously capitalized on the “kimchi premium” by executing cross-border BTC trades between the United States and the Republic of Korea where BTC was trading approximately 10% higher. After taking advantage of this arbitrage on South Korean bitcoin pricing, Alameda was soon trading a broad array of digital assets and scaled to become one of the biggest market makers in crypto.
By this time, Alameda was building relationships with many major crypto exchanges including helping Binance with large over-the-counter (OTC) trades. When FTX was founded by Sam and Gary in 2019, Binance was quick to invest.
The private sale and listing of FTX’s FTT token attracted traders and investors, and FTX’s affiliation with Alameda Research and Binance fueled the narrative that FTX would be a massive success. In 2020, FTX exploded in popularity, coinciding with the “DeFi Summer” of 2020 when many DeFi protocols experienced massive bull runs and the overall crypto bull market began to take off. Before long, FTX became one of the biggest crypto exchanges in the world and SBF was one of the richest men in crypto, as more and more people started buying cryptocurrency on the platform.
This brings us to what happened with FTX and Alameda over the last week. It appears FTX’s downfall started with a Coindesk article published on the 2nd of November which revealed that a significant portion of Alameda’s assets were held in FTT. In fact, over a third of Alameda’s $14 billion balance sheet was in FTT.
Rumors began to circulate that FTX customer funds were finding their way to Alameda, and fears that FTX didn’t have enough crypto to honor all user withdrawals began to grow. This, in turn, led to withdrawals from FTX, which accelerated when users discovered that FTX’s cryptocurrency reserves were rapidly decreasing. When Alameda began withdrawing coins from other exchanges to send to FTX, it effectively confirmed that FTX was under serious pressure.
Enter Binance. Binance announced that it would be selling its FTT. The fear created by this announcement was enough to crash the price of the token. Word spread that FTX had started pausing withdrawals. Then, it happened. It was announced that Binance had signed a letter of intent to acquire FTX in order to “help cover the liquidity crunch”. This confirmed – if confirmation was needed – that FTX was in dire circumstances. There was speculation that FTX could be saved but, after looking at FTX’s financials and uncovering an $8B hole, Binance withdrew their offer. Now, the Alameda website is also offline.
Last week, nobody suspected FTX was in danger. This week, the whole house of cards has come crashing down.
What impact will this have on the crypto industry? Well, so far, the market has reacted as you might expect. It’s been a sea of red. Another centralized crypto platform has collapsed thanks to corruption, incompetence and greed. But, crypto will survive this. The Bitcoin network continues to produce blocks, and incredible projects continue to be built.
These are dark days for crypto – no doubt – but the underlying technology remains the same. Satoshi Nakamoto’s vision was one of fixing a broken system. Greed has caused this vision to become blurred. Centralized institutions, misuse of customer funds, and criminal activity are the things crypto is supposed to allow us to escape. Instead, the industry is riddled with corruption.
The events of 2022 have left scars that will be visible for years on the crypto industry. Changes must be implemented to prevent future disasters like this and build a cleaner, brighter future.
To those who have funds stuck on FTX, we hope they do right by you.
At Coinmama, we have always advocated for maintaining control of your private keys. This recent blow-up is yet another reminder of how important that is. Not your keys, not your crypto. Trade, sell and buy Bitcoin and other digital assets safely, securely and conveniently with Coinmama.