The global market cap of all cryptocurrencies as of November 8 was $1.027T. And on November 10th, it plunged to $786T. This past Friday saw what has been dubbed the "Lehman Moment" for cryptocurrency when the third-largest exchange, FTX, filed for Chapter 11 bankruptcy and the CEO, Sam Bankman-Fried, resigned. Sam Bankman-Fried had a fortune of around $15.6B that plummeted down to $1B, 94% of his net worth down in just one day. $6B was withdrawn in 72 hours and FTX was unable to handle all the withdrawal requests. Sequoia Capital and many other venture capital firms had invested in FTX and now these investments are now considered practically worthless. This big crypto blowup will have a long-lasting impact in the industry and will give regulators countless opportunities to scrutinize cryptocurrency. Let's see what went wrong with FTX.
Sam Bankman-Fried was also a gamer, and once, during a meeting with Sequoia investors, Ramnik Arora, FTX’s head of product, caught him playing League of Legends while answering the final question. And when Musk joined a Twitter Space with over 60,000 listeners, he said “My Bullshit Meter was Redlining” and what he thought of SBF.
FTX and Alameda Research
After leaving his job at Jane Street Capital, Sam Bankman-Fried co-founded Alameda Research along with Tara Mac Aulay in November 2017. This proprietary trading firm has made 185 investments in its 5 years of operating and its current CEO is 28-year-old Caroline Ellison. On 9th November, Alameda’s website was taken down. CoinDesk recently published the company’s balance sheet, which showed that 40% of the assets were in FTT. That means, if the price of FTT falls, the company’s assets would also fall.
They reported – “As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral. There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)”. Now, Alameda Research used its FTT collateral created out of thin air for loans, so, if the value of FTT fell down, FTX and its sister firm would be in danger.
FTX was founded in 2018 by Sam-Bankman Fried to allow everyone to trade crypto. The firm was valued at $32 billion after FTX completed a $400 million series C venture capital fundraising round in January 2022. It provided spot markets in over 300 trading pairs and had a wide range of features. A while after FTX started its operations, CZ (Changpeng Zhao) bought a large stake in hopes of future returns. Later, in 2021, SBF bought their stake as he didn’t want a rival exchange to amass such a large stake in its company. The $2.1B deal was paid with FTT, the exchange’s native token that offered its purchasers many perks in the exchange, and some cash.
What went wrong?
When Alameda’s balance sheet was published by CoinDesk, CZ sold its FTT. He tweeted – “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.” With this, a lot of users realized that the selling of such a large amount of FTT would impact the exchange and so many of them withdrew their funds – $6B in 72 hours. The price of FTT fell below $22 and Sam Bankman-Fried realized that he was in big trouble after the withdrawals. It couldn’t process customer’s withdrawals and many people speculated that FTX had been using customer funds incorrectly and used customer funds to make out loans to Alameda.
Following this, Changpeng Zhao tweeted that it had signed an LOI, Letter of Intent, regarding the potential acquisition of FTX with due diligence. However, Binance later tweeted that it would not go further with the deal due to the latest news reports regarding mishandled customer funds and alleged US agency investigations. “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity,” Binance said in a tweet Wednesday. “But the issues are beyond our control or ability to help.”
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 https://t.co/FQ3MIG381f.
— Binance (@binance) November 9, 2022
During the summer, when the crypto prices were crashing, the “Crypto White Knight” had put up ~$1B to bail out firms and help let the industry stay afloat. Yet now, he himself was facing a huge problem and sent a series of 22 tweets and acknowledged that he had “f*cked up” and was sorry. Alameda research was winding down trading and Sam noted that FTX US was not going to be impacted by this. He claimed that he made incorrect assumptions about the user margins and the next day, in order to better manage client withdrawals, FTX and Tron came to an agreement to provide a unique service where owners of TRX, BTT, JST, SUN, and HT can swap assets from FTX 1:1 to external wallets. On November 7th, he tweeted “A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine.” and deleted the tweet the next day. John Ray replaced Sam Bankman-Fried as he stepped down as CEO and filed FTX Tradings Ltd and Alameda Research for Chapter 11 bankruptcy.
1) I'm sorry. That's the biggest thing.
I fucked up, and should have done better.
— SBF (@SBF_FTX) November 10, 2022
Binance and several other exchanges such as Kraken announced that they would now have proof-of-reserve audits in place that gives evidence that the firm holds the assets it claims to own on behalf of its clients. On November 12, $600M was hacked from FTX and an account administrator wrote “FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t go on FTX site as it might download Trojans,” in the FTX Support Telegram chat. The message was pinned by FTX General Counsel Ryne Miller. The crypto winter has been worsening, with a plethora of hacks and major incidents such as this. We can only wait and watch what happens next.
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