The crypto space is under siege shortly after Three Arrows Capital, as well as the LUNA and TerraUSD collapse. FTX is the latest culprit facing a major wipeout, going from hero to zero almost overnight.
If you’re a crypto investor, you, too, are up in arms after enduring yet another market meltdown due to poorly managed projects. The latest seismic disruption comes from the fourth largest cryptocurrency exchange worldwide, FTX, once considered an industry stalwart.
CEO, billionaire Sam Bankman-Fried faces a rapidly worsening liquidity crunch after native token FTT toppled more than 80%. It was triggered by what appeared to be a Twitter war with competitor Binance’s Canadian-Chinese founder, CZ, ultimately eviscerating a massive selloff.
FTXs collapse has sent shockwaves across the crypto space, with some saying that it is setting us back several years. The industry overlooked its core tenets of distrust, asset self-custody, and verification. Numerous red flags were also ignored, which saw FTX and Bankman’s value, at $32 billion a couple of months ago, go from hero to zero.
The Fall of Crypto Giant FTX
Based out of the Bahamas, FTX operated a crypto exchange with its backbone in the FTT coin and Sam Bankman-Fried, its ex-billionaire CEO. Together with Alameda Research, his investment firm, SBF was a self-made crypto emperor and a philanthropist that once said he’d donate his fortune to charity.
Until two weeks ago, FTX and its founder looked to get an induction into the crypto hall of fame as an investment hero. Besides the philanthropic movement he’d spearheaded, Bankman-Fried was viewed as one of the sector’s drivers into the mainstream.
In the wake of stablecoin Terra USD’s $60 billion collapse, FTX had managed to circumnavigate the liquidity crisis seen earlier this year. At the time, Sam Bankman-Fried was at the forefront of extending emergency liquidity bailouts to companies hit by the crypto carnage.
He was, after all, the Democratic Party’s most significant donor, and investors saw the exchange plus its token FTT as heralding stability and industry maturity. But the company has filed under chapter 11 US bankruptcy laws, and John J. Ray III has replaced Sam Bankman-Fried as FTX CEO.
The liquidity crunch and debt transition facing FTX also cover its 130 sister corporations, including Alameda Research. Immediate relief offered by chapter 11 allows the banner group to assess its credit situation and maximize stakeholder recoveries. That’s according to a statement on Twitter, dated November 11th, and attributed to FTXs new CEO.
Crypto Investors’ Failure to Spot FTX Red Flags
The waters of web 3.0 are murkier than you, and I thought, as bad practices have orchestrated massive crashes. But while failure is part of the process, entrepreneurs of crypto drivers such as exchanges have a responsibility not to disturb a market already in turmoil.
These bad practices include luring investors, clients, users, and other stakeholders with consolidated messages, such as the tweets that started the FTX meltdown. But it’s apparent that SBF had built a house of cards, or eggs-in-one-basket scenario, not dissimilar to the Terra USD saga.
Trouble started with the native FTX token, FTT, which was designed to support the crypto exchange group’s various projects. That way, holders could access trading discounts, cashback, or lower staking fees, much like with Binance’s BUSD and BNB coins.
How holders used these tokens to support FTX’s objectives exposed the exchange’s value to volatility. But it was when CoinDesk exposed Alameda Research’s balance sheet to contain massive amounts of FTT that was insolvency ever questioned.
As of June 30th, Alamedas $14.6 billion balance contained unlocked FTT as its most significant asset, according to the November 2nd story. That includes a huge pile of FTT collateral worth $2.16 billion, suggesting that the investment firm and FTX weren’t separate entities.
Since native coins aren’t strictly regulated, one of their biggest downsides is that they easily fall prey to market noise. But damage came when another whale holding large FTT reserves, Binance, decided to dump after the CoinDesk report.
Was Binance’s CZ’s Intention to Acquire or Sound the Death Knell for FTX?
Binance heralded the end for FTX with tweets from CEO CZ dated November 6th. His implication that they were in the process of liquidating all the FTT held in stock over six months caused panic. Selling pressure saw the tokens price plummet 90%, and with it went the FTX/Alameda Research balance sheet, as most of it was in this value.
But what backed these FTT, you ask, or what value in assets or commodities had FTX and Bankman-Fried’s Alameda invested in the project? None, except market prices for trading supply portions on monitored exchanges and the trust of investors.
Even by trading 1% of their projects tokenomics, the founder or whale of a project achieves a market cap that’s only on paper and, therefore, illiquid. Besides their non-absorption by the market, volatility and frenzy withdrawals can cause their value to drop significantly, casing point FTX.
After the Twitter back and forth between SBF and CZ, a strategic transaction was reached for FTX by Binance. News emerged indicating a Non-Binding Letter of Intent or LOI for potential acquisition, and that stance was later retracted, citing mismanagement of investor funds.
The once giant FTX Group, on its knees, commenced a voluntary chapter 11 process once Binance dropped any acquisition intentions. While many opinions emerged, what’s true is that their books aren’t healthy, and the industry has been dealt with a new layer of mistrust.
Could It Get Worse Than the Misuse of Customers’ Funds for FTX?
Binance pulled out of the deal to acquire FTX due to the immeasurable problems with their balance sheet. While SBF owned up and admitted his mistakes, he’d also tried to reassure investors that everything was fine with FTT.
But it wasn’t. Remember, this is a token generated out of thin air and toted between Alameda Research and FTX, owned by Bankman, to achieve a non-liquid market cap.
On the balance sheet was another asset, a Serum token for which FTX held $2.2 billion worth. However, serum’s market cap is only $84 million, and it’s emerged that SBF co-founded this crypto.
Only after the bankruptcy papers came out investors found out what their FTT was worth, nothing. Every one of the $8.8 billion market caps was customer funds, with liquid assets backing only 10%.
Remember the web 3.0 Blockchain rules you and I have ignored? One says that it’s not your keys, therefore, not your coins. There wasn’t a single Bitcoin asset backing FTX’s balance sheet, but instead, paper, IOUs, and fake assets.
Besides that, it emerged that FTX used backdoor coding on its Blockchain to move funds out of the exchange while everyone was in panic mode. Over $400 million was drained from the company’s account days after the bankruptcy was announced, allegedly ending up in two separate crypto wallets.
After the FTX Saga, What’s Next in the Crypto Space?
One lesson from the FTX saga is that you should always obey the tenets of crypto investing if you need to avoid incurring losses. Sam Bankman-Fried always spoke of yields and such gains, a suspicious policy for an exchange to take.
Away from the rabbit hole of conspiracy theories, it’s not the first or last time this sort of thing occurring. Avoid holding your crypto assets in exchanges, as there are rumors of who’s next on the chopping block. Some will tell you BlockFi, others Crypto.com, yet you may hear its Gate.io.
It’s a ruthless space, and you should consolidate to Bitcoin, which now exists in its space. Avoid yield farming tokens and choose assets that let you hold your keys or with a low time preference. If that’s not underlined by the FTX saga, from hero to zero, nothing will.
Final Word on the FTX Saga
Besides Sam Bankman-Fried, crypto entrepreneurs that have fallen from grace this year include CEOs of Three Arrows Capital, Alex Mashinsky, and Do Kwon. It may take months for the dust to clear, and the full extent of FTX’s $32 billion debacle is obvious.
But what’s apparent is that SBF has done most of the damage at this once significant and trusted centralized exchange. I wouldn’t be telling you how he managed to blow a $10 billion hole in the balance sheet of FTX if the industry had stuck to the rules always preached.
Rule number one is that these aren’t your keys. The coins you hold are not your tokens either. Another is don’t trust, which is the core tenet of decentralization, but instead, verify. Without these, you and I, plus millions of crypto enthusiasts, will keep losing. The industry will continue reeling with these seismic events while analysts argue whether it was a black swan, a rug pull, pump, and dump, or a scam by any other name.