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Behind FTX's Collapse

FTX, the world’s second-largest crypto exchange, a company valued at $32 billion has recently applied for bankruptcy.

Why it matters: FTX was widely regarded as one of the most stable and responsible companies in the wild, with a valuation of $32 Billion.

  • Brainchild of Sam Bankman-Fried (SBF), he initially founded Alameda Research in 2017 as a proprietary trading firm that dabbled in cryptocurrencies.

What just happened: Earlier this month, the news outlet CoinDesk reported that Alameda Research held much of its reserves in a crypto token that FTX itself had created, FTT and it was not a small amount over $10 Billion was transferred from FTX user's accounts.

  • This money went to cover many losses that occurred after the recent crash of Terra Luna, Celsius, Voyager, and more.

  • Reports say the losses were so bad that Alameda was on brink of bankruptcy in March 2022 and was looking for $2-5 Billion in outside funds

In April, Sam Bankman reached out to Elon Musk for an investment of $5 Billion but got refused after Musk questioned the legitimacy of FTX's assets.

Major Red Flags: While the bankruptcy was not expected, their were major red flags inside FTX's headquarters, Here are some of them.

  • They did not have a Board of Directors and was run solely by Sam himself (More)

  • FTX had a “backdoor” built into its accounting software by SBF.” This route was used to move assets in the billions of dollars without triggering alerts to staff and external auditors. (More)

  • FTX and its more than 130+ subsidies were registered in the Bahamas which is famous for its flexible laws against white-collar crimes.

  • They worked with the auditing firm Prager Metis which has an office in the Metaverse

  • Sam Bankman invested back more than $500 Million in Sequoia and Other VCs firms.

  • FTX also purchased $300MM in real estate including in the "playground of the rich" Albany, Bahamas

FTX also purchased a $300MM in real estate including in the "playground of the rich" Albany, Bahamas
FTX's $300MM real estate in Albany, Bahamas

How did this happen: If media speculation is to be believed, the problem lies with the liquidity of funds, i.e. customers wanting their funds back.

  • Herein lies the controversy, if an exchange is only acting as an intermediary, it should never have a problem returning the funds as a mere middleman, one does not take customer funds and spend them as if they were your own.

But SBF used FTX's customer's funds to loan Alemeda which in turn pumped FTX’s own crypto token called FTT.

  • Nobody knew how many FTT tokens Alameda actually held except when somebody leaked their balance sheet to CoinDesk paving the way to a mass frenzy of customers demanding their money back.

Here's a quick look into SBF's empire built on lies:

Meanwhile: To further boost its value, FTX (the trading company) began purchasing its token with a portion of its actual revenue (generated from transaction fees).

  • To artificially increase the demand for FTT by purchasing their own coin.

By using Alameda, SBF purchased FTT tokens for dirt cheap and made a bunch of money.

  • This also pumped Alameda’s assets making investors more optimistic about FTX's future which then increased FTX's valuation to $32 Billion.

But why they needed so much money? Well simply to compete with Binance and others.

  • In June, FTX's biggest competitor Binance launched a $0 transaction fee, where they stopped charging money. This skyrocketed its trading volume to the stratosphere.

Now in order to afford such kinds of offers you need big money! And FTX made tons of that by frauding its customers. This was then spent on buying naming rights to football arenas, Bringing Tom Brady as a brand ambassador, and a bunch of Superbowl commercials.

  • FTX buys 19 years of naming right for a whopping $135 million (More)

So what next: On Monday, FTX officially declared bankruptcy

  • In the 23-page bankruptcy filing obtained by CNBC, FTX indicates it has more than 100,000 creditors, assets in the range of $10 billion to $50 billion, as well as liabilities in the range of $10 billion to $50 billion. By comparison, Lehman had more than $600 billion in assets and Enron had $60 billion.

  • FTX's backer Sequoia Capital marked down its $200 Million investment to zero dollars addressed in a letter to its investors. (More)

As part of the move, FTX founder Sam Bankman-Fried, known as SBF, will step down from his role as chief executive. He will be replaced by John J. Ray III, the lawyer who was brought in to clean up the mess during Enron’s infamous collapse in the mid-2000s.

FTX gets hacked: FTX officials appeared to confirm rumors of a hack on Telegram, instructing users to delete FTX apps and avoid its website. Over $1 Billion of customer funds are currently affected. Chief Security Officer at Kraken says they have identified FTX hacker.

  • Many FTX wallet holders reported $0 balances in their and FTX US wallets. FTX’s API appeared to be down, which could account for this. According to on-chain data, various Ethereum tokens as well as Solana and Binance Smart Chain tokens exited FTX's official wallets and moved to decentralized exchanges like 1inch. Both FTX and FTX US appear to be affected.

In short: FTX crashed, and filed for bankruptcy, followed by an assurance of stable assets, further followed by widespread criticism and resignation of related parties.

(We are constantly updating the story)


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