By CHRIS ILLING
Chief Commercial Officer
@ ActivTrades Corp
WHAT exactly happened? How could FTX go bankrupt almost overnight? And what does that mean for the entire market? We are trying to reconstruct the whole drama.
FTX is Sam Bankman-Fried’s (SBF) stock exchange. Sam is one of the products of the 2020-2021 bull market. He was previously virtually unknown, although he has been very successful in arbitraging tether dollars and introducing institutional investors with his trading firm, Alameda Research.
In November 2017, he founded Alameda Research, a quantitative trading firm. As of 2021, SBF owned approximately 90 percent of Alameda Research. However, he became a legend in the ecosystem through his exchange FTX, which raised massive amounts of capital with the sale of its own token, FTT, and invested heavily in the crypto currency, Solana. Solana multiplied in value, and in an amazingly short amount of time SBF had amassed a fortune of just over $16bn
But then, on November 2, the website Coindesk published an article about a leak in Alameda’s balance sheet. Alameda listed assets of $14.6bn and liabilities of $8bn. That looks solid – at first glance. Yet if you look just a little closer, any impression of stability disappears.
The majority of Alameda’s assets consisted of highly speculative coins and tokens: $3.66bn in FTT tokens; $2.16bn in ‘FTT collaterals’, $3.37bn in various cryptocurrencies - including more than $1bn in Solana - as well as $134m and $2bn in “equity-related securities”.
At the time of publication, the FTT token price has already fallen. Their total market cap was $3.35bn. Alameda had such a large chunk of the total amount on its balance sheet that it was impossible to liquidate even a fraction of it in the markets without the price plummeting.
FTX issues one coin, FTT, and its sister company, Alameda Research, holds most of it. It is not very trustworthy that most of Alameda’s total capital consists of tokens that are centrally controlled by FTX, and created out of nothing really. The balance sheet was made even flimsier by the fact that the FTT tokens, whose value was ultimately pure fantasy, were still used as collateral to lend other coins or to engage in margin trading.
Monday, November 7, 2022
Binance breaks with FTX. Binance boss, Changpeng Zhao and FTX chief, Sam Bankman-Fried, were once closely connected as pioneers in the industry and partners, but then developed into arch-rivals with their crypto exchanges and recently fell out over regulatory issues. SBF became more and more the mouthpiece of the crypto scene, and tried to lobby politicians and supervisors.
A tweet from Zhao stated: “Due to the recent revelations that have come to light, Binance has decided to liquidate all remaining FTT.” However, as Zhao explained in his tweet series, Binance was trying to manage sales in a way that did not affect the market. Therefore, the liquidation should take place over the next few months.
This action also affects Solana, the second strongest position in the Alameda portfolio. Solana drops sharply within 24 hours.
Tuesday
Binance wants to take over most of FTX’s business. However, it is initially only a non-binding letter of intent (LOI), as Binance boss, Changpeng Zhao, emphasised.
The problems in FTX trigger an avalanche in the crypto market on Tuesday. Investors withdrew around $6bn from FTX within 72 hours, exacerbating liquidity problems. The world’s best-known crypto currencies, Bitcoin and Ethereum, fell in value by double digits for the second day in a row due to the turmoil at FTX. This fuelled further concerns about the health of FTX, and investors started withdrawing more money. The FTT token crashed 72 percent on Tuesday.
Wednesday
After the start of its due diligence audit, Binance quickly distance itself from the takeover plan. Binance backed out after reviewing FTX’s structure and books. It said in a statement to The Wall Street Journal: “Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
Thursday
To bring some clarity to the impending bankruptcy of his company, SBF now turned to his followers via Twitter. He writes: “I’m sorry ... I screwed up and should have done better.”
SBF files for personal bankruptcy. FTX faced a liquidity shortfall of $8bn “due to withdrawal requests”.
Friday
Crypto exchange, Crypto. com, suspended withdrawals after two stablecoins, USDC and USDT, fell below the dollar. This shows how sensitive the markets have been since the announcement that Binance was walking away from its FTX takeover.
During times of high market uncertainty, stablecoins typically fall below their dollar parity. That is because investors are selling cryptocurrencies against stablecoins. However, this time it is different, as investors are apparently preferring to leave the crypto market behind altogether and consequently exchange their holdings for fiat.
FTX files for bankruptcy in the US, and SBF steps down as chief executive.
Conclusion
This incident, and the speed with which it unfolded, is a clear example of regulators concerned about the lack of guard rails in the free-roaming crypto space. Jurisdictions that have considered relaxing regulations may no longer do so.
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