With over 500,000 traders liquidated to the tune of over a billion dollars, the cryptocurrency space is at the precipice of another black swan event, one that would make the Terra Luna debacle seem like child’s play.
We are talking about the problems facing FTX, the second largest cryptocurrency in the world, run by quantitative trader Sam Bankman-Fried, who is now broke after losing his spot as the second richest man in crypto.
How it happened: FTX is a centralized cryptocurrency exchange that earns money on fees from the trading of cryptocurrency assets on its platform. The company also offers other services like cryptocurrency futures trading, lending, etc.
- The platform averages a total volume of transactions of $7 billion in the last 30 days, according to data from Coinmarketcap.
- Sam Bankman-Fried, popularly known as SBF, is regarded as the ‘saviour of crypto’. This is because of his involvement in trying to save cryptocurrency firms that were suffering a liquidity crisis due to macroeconomic issues, as well as companies that collapsed due to the downfall of the Terra blockchain, the LUNA, and the UST token. While many praised him for this move, his saviour instinct turned out to be the beginning of the end of his company.
Cracks Open: The cracks in the organization began to show when Alameda CEO Sam Trabucco suddenly resigned. Additionally, a month later FTX President Brett Harrison stepped down. These resignations occurred just before it was revealed that FTX was facing some legal trouble in the form of a securities regulator probe.
- Also weighing in were some of those deals involving Bankman-Fried’s trading firm, Alameda Research, which led to a series of losses that eventually became his undoing, according to a Reuters report, which cited three people familiar with the company’s operations.
- At this point, it is important to speak on the bitter rivalry that existed between SBF and Binance CEO, Changpeng Zhao, popularly known as ‘CZ’. The rivalry dates back to 2015 when CZ suggested that SBF’s trading firm tried to attack Binance.
Now, at the start of the week, CZ tweeted that it would sell all of its FTT tokens and also suggested that FTX and SBF were engaged in foul play. He stated:
- “Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, 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.”
In that tweet, CZ did two things; the first suggested that FTX had a liquidity crisis by stating he was learning from the LUNA issue, and the second, suggested that SBF was lobbying against other cryptocurrency industry players behind their backs for an advantage. This tweet was the start of a bank run that ultimately ended the FTX empire.
The accusation stemmed from SBF’s support for the DCCPA draft bill, which was outrightly rejected by the cryptocurrency community as the bill would stifle the growth of Decentralized Finance (Defi).
- Multiple key industry figures have spoken out against the bill, most notably “Bitboy,” who is working on his own. His support for the bill damaged SBF’s reputation in the crypto community and this saw sentiments shift as people realized his intentions may be different from what was first thought.
- This shift in sentiment was the precursor for what came next, and a major contributor to the severity of the recent FUD put out by CZ.
- Concerns started to make the news after a report by CoinDesk, which leaked Alameda’s balance sheet.
The report revealed that the net equity in the Alameda business is FTX’s own centrally controlled token called “FTT.” Per CoinDesk, Alameda research has $14.6 billion of assets, against $8b of liabilities.
For assets: $3.66b FTT, $2.16b “FTT collateral”, $3.37b crypto ($292m SOL, $863m “locked SOL”), $134 million & $2 billion equity securities. This meant most of the net equity on the balance sheet was tied to completely illiquid altcoins. This was also another reason why CZ went ahead to sell Binance’s FTT tokens on the open market.
When the tweet was sent, as you would expect, SBF responded by stating:
- “A bunch of unfounded rumours has been circulating… FTX keeps audited financials etc. And, though it slows us down sometimes on the product, we’re highly regulated. We’ve already processed billions of dollars of deposits/withdrawals today; we’ll keep going. (Taking up anti-spam checks to process more–sorry if you got those. We’re hitting node rate capacity, will keep going.)
- “Also, tons of USD <> stablecoin conversions going on. And in the end, you should do what you want, and trade where you want. We’re grateful to those who stay; and when this blows over, we’ll welcome everyone else back. As always — a huge thank you to our supporters. And to everyone else, as well, as long as they keep building and keep moving the industry forward. We’ll keep building too.”
While SBF aimed to ‘calm’ the nerves of investors and customers alike, the tweet sent by CZ, who is the richest man in crypto, had already done damage.
- As with LUNA, the tweet caused a bank run to already worried cryptocurrency investors who have been extra cautious and reactive to news or suggestions of a company being insolvent as many well-established cryptocurrency firms have folded up this year alone.
- This saw FTX’s primary token, FTT, dumped as a result, dropping 15% from its weekly highs. However, it initially found strong support around the $22 region. FTT isn’t the only worry though, Alameda holds many more tokens which are now subject to downside pressure as the situation deteriorated. One of those tokens suffering a significant downside is Solana’s SOL token.
A bank run is when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns about the entity’s solvency. As more people withdraw their funds, the probability of default increases, prompting more people to withdraw their deposits. In extreme cases, the entity’s reserves may not be sufficient to cover the withdrawals.
- After SBF’s tweet, on-chain analytics data revealed that FTX had a liquidity crisis as a bank run began. This is because we saw a staggering amount of outflows, as people rush to withdraw funds and some people were forced to wait 4 hours to process withdrawals. In just a few hours, FTX saw outflows amounting to approximately $450 million. Then ultimately, FTX stopped processing withdrawals.
- After it became clear that FTX was insolvent, CZ, according to his tweet, explained that FTX reached out to him and they both initially agreed to sign a non-binding LOI, intending to fully acquire FTX and help cover the liquidity crunch. SBF also released a statement confirming that they had reached out to Binance to help with the bank run the firm was facing.
Then, a day after, Binance’s official account tweeted:
- “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.” On this, CZ stated, “Sad day. Tried, but **with a teary-eyed emoji**.”
The aftermath
- The cryptocurrency market reacted as a contagion effect. Bitcoin traded new yearly lows alongside many other cryptocurrencies. The cryptocurrency market capitalization is now trading at $800 million.
- FTT, the native token of the FTX exchange currently trades at $2.82 as of the time of this report. Its market cap currently stands at $374 million. The token is down over 88% in the last seven days.
- The trading volume of FTT tokens has fallen by over 70% in the last 24 hours.
- SOL, the native token of the Solana blockchain is down over 50% in the last seven days as a result of exposure and relationship with SBF and his firms.
- From being ranked the second largest exchange, Coinbase has overtaken it, leaving Kraken in third place according to Coinmarketcap. FTX ranks #71, with an exchange score of 4.2. FTX U.S. ranks #24.
- There are now multiple investigations into the dealings of FTX, Alameda, and the relationship between the two firms.
Finally: Although many believed CZ’s tweet was calculated, gotten out of the playbook of tv character Bobby Axelrod of the popular tv show, “Billions,” he has clarified that he never wanted the downfall of FTX as he tweeted:
- “I was out with friends yesterday when the topic of whale alerts came up. Following our principles, I decided to be transparent. So, I wrote a thread in 5 mins and posted it. Little did I know it was going to be the straw that broke the camel’s back. Everyone wants more transparency in our industry, right? My tweets were simple. There were questions about a large ($580m) FTT deposit to Binance, and we were transparent about the fact that we are closing our FTT position.
- “The fact that it sparked such levels of “discussions” was surprising. There were also conspiracy theories that I somehow orchestrated this whole thing. If you read this thread you would appreciate that no one can orchestrate this. Funny memes, media & some people tried to colour this as a “fight.” Sorry to disappoint, but I spend my energy building, not fighting. Today I spent my day on our business & our community. I suggest others do the same. Back to building.”