1 March

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6:38 PM UTC
1 March

|

6:38 PM

FTX crash: Details and fallout

What happened to FTX?

Sam Bankman-Fried (SBF) is the CEO of FTX, one of the biggest exchanges in the world and also an official shareholder of Alameda Research, a private trading firm previously established by SBF. SBF is also the owner of the US-based cryptocurrency exchange FTX.US. Despite not being in charge of FTX’s day-to-day operations, he is regarded as one of the leaders of this exchange. FTX is also considered a major investor through FTX Ventures, which makes more than 60 individual investments. In November 2022, the entire FTX system crashed.

The incident emerged when Coindesk reported on November 2 that FTX’s FTT token accounted for around $6 billion of Alameda’s total assets ($15 billion). This report focuses on a rather high illiquidity given that Alameda’s entire assets are FTX (it is twice the amount of FTT in circulation) and the relationship between FTX and Alameda Research also causes several concerns in the market.

Changpeng Zhao, the CEO of Binance, said on November 6 that his exchange would liquidate FTT for USD 2.1 billion. Soon after receiving the news, Alameda tweeted in response that it would buy FTT at a market price of $22.

The situation is not resolved, though. The dramatic drop in FTT’s price raises concerns about FTX’s liquidity. Furthermore, the exchange saw $6 billion in withdrawals in the 72 hours before things reached a head on the morning of November 8. Binance reached a deal with Sam Bankman-Fried’s FTX to buy the rival crypto exchange, rescuing the firm from a liquidity crisis. However, when looking at the FTX report, Binance did not agree because “the issues are beyond our control or ability to help.” Additionally, Binance said that “FTX mishandled customer reports related to cryptocurrencies.”

The tipping point is when the incident is that Zhao Changpeng, chief executive of the cryptocurrency exchange Binance, decided to sell all remaining FTT tokens. “This is actually a knife slash to the competitors, causing investors to panic,” said Claire Balva, Blockchain and Crypto Director at KPMG France.

In the afternoon of November 10, Bankman-Fried’s internal message to staff over the FTX crisis was leaked, revealing that the exchange would devote all of its resources to the final fundraising to reopen next week. On November 10th, FTX crypto exchange was rejected by Binance and  reportedly looked to Justin Sun. Other sources claim that Binance’s withdrawal was primarily motivated by the loss of FTX – Alameda, which might be worth up to $8 billion.

What’s the impact of the FTX collapse on the crypto market?

Approximately $8 billion in user assets are at stake, and the belief in FTX token connection is rapidly declining. From November 7 and November 9, Solana dropped by 50%, while SRM dropped by 60%.

Due to their major investments in FTX, VC and major crypto firms including Jump, Paradigm, and Multicoin are said to have suffered significantly. Holdings of FTX and Solana tokens were immobilized on exchanges and were not withdrawable.

As the entire crypto market was hit by FTX, the global crypto capitalization plunged by 11% from November 7 to 9.

Additionally, authorities and policymakers who were interested in investing in cryptocurrencies used to pay attention to the SBF’s advocacy efforts, but they may now have severe concerns about the cryptocurrency market. Even if not all of the data has been made public, the cryptocurrency’s reputation is certain to suffer significantly. New entrants will lose faith and exit the market and it will be considerably more difficult to attract new investment interest than in prior years. When the third-largest crypto exchange in the world, FTX, collapses, there will be less capital entering the market, which will deter developers from building the world.

Solana has been seriously affected.

The two biggest investors in Solana and its ecosystem are FTX and Alameda, with FTX making multiple investments and holding SOL worth at least $1.2 billion as of June 30, 2022. Since many believe that FTX will sell off Solana in order to save its FTT, this is seen as the largest danger to the ecosystem’s value. 

The fact that Alameda’s interest in SOL has not yet been put up for sale represents the next known threat. 34 million SOL are now set to unstake by the end of Q3 in 2022. Solana’s price decreased by 50% after the information was made public.

Conclusion

Even though many people believe that FTX won’t crash as severely as Terra (Luna), Three Arrows Capital, and Celsius. Unfortunately, when FTX received a panic sale up to 85% of the token value, it completely plummeted beyond anyone’s expectations. Following those instances, the FTX price was unable to be stabilized, forcing the SBF to file for bankruptcy.

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