On November 11, 2022, FTX and FTX.US filed for Chapter 11 bankruptcy. Sam Bankman-Fried, the company’s founder-CEO, was arrested in the Bahamas in December.
The FTX crash shook the cryptocurrency world, which was still reeling from the Luna crash in May 2022. FTX went from being worth about $32 billion to filing for bankruptcy in the blink of an eye. This undoubtedly left many investors needing clarification.
Keep reading to find out what happened to the most prominent cryptocurrency, with a timeline of specifics. Also, discover what this event means for the cryptocurrency industry moving forward.
Sam Bankman-Fried and the Birth of FTX
You’ve heard of FTX or Sam Bankman-Fried sometime in the last decade. This is because well-known celebrities back them in major sports. Sam Bankman-Fried, who is 30 years old and is often called “SBF,” started the crypto exchange FTX. At his wealthiest, he had a net worth of $26.5 billion.
In late 2017, SBF helped start Alameda Research, a crypto hedge fund named after his hometown. Based on Alameda’s performance, SBF made its cryptocurrency exchange, FTX, in 2019. The exchange grew fast because it bought well-known companies, spent a lot of money on marketing and promised high returns. Users were told that with FTX, they could get much better returns than with other banks.
The Rise of FTX: The Overnight Fame
SBF became famous because he became a “poster boy” for cryptocurrency. He hired famous people to promote FTX. FTX had people like Tom Brady, Stephen Curry, and Shaquille O’Neal as ambassadors. In January 2022, FTX raised a massive $400 million in a round of funding. This brought the total amount of money raised to $2 billion and the valuation to $32 billion.
FTX became so popular that they bought the rights to call the Miami Heat Arena the “FTX Arena.” FTX reportedly paid $135 million for a 19-year deal to change the name of the Miami arena in June 2021.
The Collapse of FTX in 2022
November 2: Coindesk puts out a worrying article about FTX
The report details how FTT, the native FTX token, was Alameda Research’s most valuable asset. This was a worry because FTX was putting FTT on its balance sheet as collateral. This meant that the assets were tied to a volatile and risky token. This made FTX and Alameda worry about their capital.
November 6: Binance sells its FTT holdings
Because of the Coindesk report, Binance, a competing exchange, decided to sell about $530 million worth of FTT. Changpeng Zhao, Binance’s CEO, tweeted that Binance would sell off any remaining FTT tokens.
This decreased the price of FTT tokens because investors rushed to get their money out of FTX. Such is because they thought it would be the next crypto company to fail. Then, FTX couldn’t handle these withdrawal requests because there were so many. This caused FTX to have a liquidity crunch. They needed more money to pay out the withdrawal requests. Because $6 billion was taken out in 72 hours, FTX had to stop withdrawals. SBF tried to reassure investors that everything was fine on Twitter.
November 8: Binance says that it will buy FTX
Binance said that they had reached a non-binding deal to buy FTX to help with the lack of cash on the market. The deal fell through after the due diligence. Binance said the next day that they couldn’t buy FTX because they had heard that customer funds had been mishandled. Also, the rumor that a U.S. agency might be looking into the matter further concerned them.
November 11: FTX and all its subsidiaries file for bankruptcy
After a sudden fall, it was inevitable that the company would have to file for bankruptcy. This sent shockwaves through cryptocurrency, and we still see the effects.
Wrapping It All Up
FTX went from worth $32 billion to filing for bankruptcy in only a few days. Customers wanted to withdraw their money because they needed more cash. Then, Binance broke their non-binding agreement with FTX to buy them out. On November 11, 2022, the FTX exchange had no choice but to file for bankruptcy.
This breakdown of a once successful cryptocurrency exchange will make the idea of digital asset investing seem very risky. Investing in digital assets is challenging even when things are going well because they change a lot.
The realization of many is to spread risk across the industry. This goes against putting everything into a single coin or company. Because in any industry, you need to protect your gains and cut down on your losses by diversifying.
