Cryptocurrency is in chaos as FTX is on the brink of bankruptcy

New York
CNN Business

In less than a week, the 30-year-old entrepreneur, once regarded as a modern-day JP Morgan, watched his digital empire, including his billions, evaporate in a death spiral that shook the foundations of the trillion-dollar cryptocurrency industry. .

On Thursday, Sam Bankman-Fried took the blame: “I fell,” she said. long Twitter threadThe exchange platform founded in 2019 apologizes to the investors and customers of FTX.

Failures are not uncommon in the murky, largely unregulated world of cryptocurrency, but FTX is not your average cryptocurrency. Its collapse this week represents a potential turning point for an industry that many critics say has been allowed too long.

So what happened to FTX and why is all of cryptocurrency worried about it? There are still many uncertainties, but this is what we know.

Last week, cryptocurrency news site CoinDesk published an article based on a leaked financial document from Bankman-Fried’s Alameda Research hedge fund.

The report suggested the Alameda business rests on shaky financial footing. Namely, most of its assets are held in FTT, a digital token minted by Alameda’s sister firm FTX. That was a red flag for investors because the companies were separate, at least on paper. However, Alameda’s disproportionate token ownership suggested that the two were more closely related.

On Sunday, the CEO of FTX’s larger rival Binance said the company liquidated FTX holding worth 580 million dollars. This led to a downward spiral that FTX did not have the money to facilitate.

Concerns about Alameda and FTX fed into the broader cryptocurrency market on Monday. But Bankman-Fried protested, tweeting that FTX and its assets are “fine.” He also took issue with Binance CEO Changpeng Zhao, whose tweet sparked the run on FTX deposits.

There was clearly bad blood between the two, which is why the pair shocked the industry when they announced a tentative deal on Tuesday. To save FTX for Binance.

“FTX asked us for help this afternoon,” Zhao tweeted afternoon, stating that the company has a “significant liquidity crunch” and that Binance should conduct corporate due diligence before any deals.

Almost immediately after looking under the hood, Binance began to pull back.

Meanwhile, Bankman-Fried’s personal wealth also declined. According to the Bloomberg Billionaire Index, Bankman-Fried’s net worth jumped 94% in one day, from $15 billion to $1 billion, the index’s biggest one-day loss ever. (His net worth estimate was based on the assumption that Binance would eventually bail out FTX, which holds most of Bankman-Fried’s personal assets. That means his net worth could drop even further.)

On Wednesday, cryptocurrencies continued to tumble as investor concerns about the FTX bailout spread. Two of the most popular tokens, bitcoin and ether, have hit two-year lows.

The sell-off deepened after media reports that Binance was inclined to walk away from the deal. Sure enough, Zhao took to Twitter on Wednesday afternoon to bleakly assess FTX’s problems:

“Our initial hope was to support FTX’s customers to provide liquidity, but the challenges are beyond our control or ability to assist.”

It also pointed to allegations of “mismanaged funds” and investigations by US regulators.

Binance is out. FTX’s best shot at lifeline is gone.

The full extent of FTX’s financial problems is not yet known, but multiple reports suggest the firm is facing an $8 billion deficit. Without a quick infusion of capital, Bankman-Fried told investors Thursday the company faces bankruptcy.

Since the collapse of the Binance deal, Bankman-Fried has struggled to raise funds. On Thursday, it tweeted that the firm had “a number of players” it was in talks with.

“We are spending the week doing everything we can to increase liquidity,” he said in an apology letter. “Every penny of that, plus the rest of the collateral, will go to the integration of users, and then investors and employees.”

Despite its reputation as a reliable, low-risk investment portal, FTX’s business is built on a complex, extremely risky type of leveraged trading.

Customers were depositing their money to engage in crypto trading. But it appears that FTX instead took billions of dollars worth of cash and loaned it to its Alameda sister firm to fund those high-risk bets, according to The Wall Street Journal.

Bloomberg columnist Matt Levine put it another way: “FTX took their customers’ money and traded it for a bunch of magic beans, and now the beans are worthless.”

At the end of the day, FTX experienced the cryptocurrency equivalent of a classic banking transaction. Customers wanted to withdraw their money and FTX had no money.

In traditional finance, customer funds are protected by the Federal Deposit Insurance Corporation, which insures deposits. The FDIC does not insure stocks or cryptocurrencies, yet FTX puts the fate of its customers and investors in question.

One of those investors was the Ontario Teachers’ Pension Plan, which said it invested $95 million in both FTX International and its U.S. venture “to have a small-scale impact on an emerging area in the financial technology sector.” In a statement Thursday, the plan said any losses on the investment would have a “limited impact” because it represents less than 0.05% of its total net assets.

On Thursday, Bankman-Fried said Alameda Research would cease trading while FTX would focus on emergency fundraising.

But after Binance, the industry’s largest exchange, shied away from bailing out its rival, FTX may have few options.

In a memo obtained by the New York Times, Bankman-Fried told employees that FTX was in talks with crypto entrepreneur Justin Sun, who tweeted that FTX was working to “find a solution.”

Meanwhile, US officials, including the US Department of Justice and the Securities and Exchange Commission, are investigating FTX’s business, according to Bloomberg.

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