Last updated on April 24th, 2024 at 07:11 am
The collapse of FTX and its founder, Sam Bankman-Fried, in late 2022, sent shockwaves through the cryptocurrency world. Their influence on the global cryptocurrency community will endure the FTX scam for years to come.
Cryptocurrency has been a hot topic in the news for the past few years, with the soaring values of Bitcoin, Ethereum, and other prominent coins leading to an explosion of new coins, NFTs, and startups seeking to tap into the lucrative asset class.
However, as the world faces economic turmoil and rising interest rates, the crypto sector took a nosedive, with many declaring it dead. Unfortunately, the downfall of the FTX exchange and Sam Bankman-Fried may very well be the final straw for the struggling crypto market.
Table of Contents
What Was FTX ?
Let me introduce you to FTX, a top-notch cryptocurrency exchange that allowed its users to trade fiat currency for a massive selection of a humongous number of cryptocurrencies created in the last 14 years.
FTX was founded by the mastermind, Sam Bankman-Fried, in 2019, and was just one of many ventures he embarked on, including the successful trading firm, Alameda Research.
Although it wasn’t the behemoth of crypto exchanges, FTX still managed to make a big name for itself with its investments in high-profile celebrity endorsements, attention-grabbing Super Bowl commercials, and strategic sports team sponsorships.
In short, FTX was widely recognized and highly regarded in the cryptocurrency world.
With user volume that ranked it third, only behind Coinbase and Binance, FTX was a go-to destination for buying and selling various crypto coins.
In addition to the exchange’s primary business, which generated profits through user fees and commissions, Sam Bankman-Fried’s hedge fund focused solely on speculative trading within the crypto markets, instead of conventional equities or fixed-income investments.
A New Era of Bank Run
A digital bank run proved to be the beginning of the FTX scam in November 2022. Historically, bank runs occur when customers, worried about economic or bank-specific risks, rush to withdraw their cash.
Banks use customer deposits for loans and to earn interest through Treasuries, meaning they never have the full equivalent of total deposits on hand. Thus, during a bank run, the bank risks running out of money to repay its customers.
Alamanda Research
“SBF founded Alameda Research, which was tightly linked to FTX’s core operations. In November 2022, CoinDesk uncovered the fact that a substantial part of Alameda Research’s assets were invested in FTX’s token, FTT.
This caused suspicion and Binance quickly declared a fire sale of their FTT holdings, igniting a digital bank run as customers attempted to sell their FTT positions.
Tragically, the bank run played out as expected – with FTX illegally using customer funds to finance Alameda Research’s trading, the exchange was unable to fulfil customer redemptions and many saw their wealth vanish into thin air.
What happened during the FTX scam?
FTX’s scam occurred over ten days in November 2022. The trigger was a CoinDesk report published on November 2nd that exposed Alameda Research, led by Bankman-Fried, holding a $5 billion position in FTT, FTX’s native token.
The report revealed that Alameda’s investment foundation was in FTT, the token created by its sister company, rather than in fiat currency or another cryptocurrency. This raised alarm bells throughout the crypto industry, sparking concerns about Bankman-Fried’s companies’ undisclosed leverage and financial stability.
The Dirty Detail
Let’s see the details of the FTX scam and what exactly happened in depth:
Making Market
From the beginning, Alameda Research played a critical role as FTX’s primary market maker, guaranteeing a buyer or seller for each transaction and crucial to a thriving exchange, similar to stock markets.
Yet, the relationship between Alameda and FTX is unique and intertwined. Traditional equity markets demand a sharp distinction between a market maker and an exchange to steer clear of conflicts of interest. However, the world of cryptocurrency lacks these regulations.
Reckless Lending
Over time, the extent of unethical lending to fuel Alameda Research came to light. Sam Bankman-Fried (SBF) poured more than $10 billion of customer funds into the trading firm.
Alameda then used that cash for its riskiest moves, rather than holding it as a reserve or investing in safer options like Treasuries.
This was unethical, and even more concerning was the fact that CEO Caroline Ellison seemed to have a lack of understanding of due diligence and risk management, as she previously admitted to not using stop losses in their trading strategy.
Unauthorised Transactions
As the crisis worsened, those at the helm of FTX scam, including SBF, frantically worked to keep the ship afloat, allay investor concerns, and maintain a veneer of stability.
But while they put on a brave front, shady activities continued to unfold behind the scenes. On November 11th, as the storm was gathering strength, someone quietly transferred a staggering $500 million from FTX into mysterious wallets, suspected to belong to SBF and his accomplices.
This early manoeuvring suggests that those involved had prior knowledge of the FTX fraud and chose to prioritize their interests over their fiduciary responsibility.
How This FTX Scam Affected The Crypto Market
On November 9th, Bitcoin experienced a 15% decline. With prices dropping from $18,500 to $15,625, due to Binance’s withdrawal from an acquisition.
Despite a slight recovery to above $17,500 the following day, Bitcoin faced another setback and tumbled back into the $16,000 range with the announcement of FTX’s bankruptcy on November 11th.
Ethereum similarly suffered, with a 15% drop and trading around $1,090 per share. Solana faced a 42.5% loss over a seven-day period.
While FTX Token faced an even greater decline with a 70.5% drop during this scam bust period, according to CoinGecko’s data. Different conclusions have been drawn within the sector regarding the collapse.
Some argue that it’s a triumph for “decentralized finance,” which leverages computer code to create versions of financial services that don’t rely on trust or a central authority.
Unlike traditional finance, there is no head of a DeFi exchange who can use customer funds to purchase a $40m penthouse. However, outside the sector, the conclusion is crystal clear.
Cryptocurrencies are a bet on the idea that a world free from government control over money and finance would be superior. Nonetheless, the collapse of FTX offers compelling evidence that government regulations over finance are, in fact, quite useful.
Will People get their money after FTX Scam?
While some individuals will receive a portion of their lost funds, it’s unlikely that anyone will recover their entire deposit. Even Bankman-Fried acknowledges that it would take an $8 billion capital infusion to make all depositors whole, but the accounts presented by Ray refute this claim.
Future of FTX and consequence of collapse
The future of FTX as a cryptocurrency exchange is under threat. Its collapse could have far-reaching implications for the entire crypto industry. As the largest failure in crypto history, FTX fraud could further discourage already wary investors and trigger legal action from affected customers.
The SEC and other regulators may use this incident to tighten their grip on the crypto world, and Congress may feel inclined to create new laws to govern digital tokens and exchanges.
The shockwaves of FTX’s Fraud , the third-largest crypto exchange by volume, will continue to ripple through the crypto community. BlockFi, a crypto lender, has already paused client withdrawals, and rumours suggest it may face an uncertain future.
Meanwhile, withdrawals increased at Crypto.com, and Genesis Global Capital has halted customer withdrawals from its crypto lending unit.
