FTX Trading Meltdown: What You Need to Know

One of the world’s leading cryptocurrency exchanges crashed and burned in spectacular fashion this week as FTX Trading filed for Chapter 11 bankruptcy protection.

Until recently FTX was the darling of the cryptocurrency world — a startup founded by two MIT graduates who aimed to build a company that would allow users to buy and sell bitcoins and other digital currencies. But after a meteoric three-year rise that turned one of its founders and former CEO, Sam Bankman-Fried, into a multibillionaire, FTX suddenly unraveled.

The collapse rattles the nascent crypto industry and digital currencies themselves, which have long been overshadowed by questions about their value and safety as investments. Here’s what’s happening.

What is FTX?

FTX Trading is the Bahamas-based company that operates the FTX cryptocurrency exchange. Sam Bankman-Fried and Gary Wang founded the company in 2019 and built it into the third largest crypto platform by trading volume. In its early stages, FTX has raised a total of nearly $2 billion in venture capital from a range of investors, including blue-chip venture capital firm Sequoia Capital, wealth management giant BlackRock and even the Ontario Teachers’ Pension Plan, according to with PitchBook. .

Investors use FTX to buy, store and trade hundreds of different cryptocurrencies including bitcoin, ether, solana, litecoin, ripple and dogecoin. About $840 million worth of crypto assets are exchanged on its platform daily, according to CoinMarketCap.

FTX raised its profile in recent years with explosive Super Bowl commercials featuring quarterback Tom Brady and comedian Larry David. Its list of famous shareholders includes NBA player Stephen Curry, Brady’s ex-wife Gisele Bündchentennis star Naomi Osaka and Shark Tank’s Kevin O’Leary;

What drove FTX to declare bankruptcy?

By the end of 2021 FTX had annual revenue of $1 billion, but it has fallen this year amid a sharp drop in cryptocurrency prices. Within weeks, FTX found itself billions of dollars in debt after a series of miscalculations and failed investments.

said Bankman-Fried in a tweet this week he mistakenly believed that the company had enough cash on hand to pay 24 times the amount of money users typically withdraw in a day. In fact, FTX only has enough cash to pay 0.8x that – a dangerously thin capital cushion.

The miscalculation proved disastrous last weekend when FTX experienced the crypto version of a bank run. Users withdrew about $5 billion in one day amid growing concerns about FTX’s solvency. Days later, Bankman-Fried told investors that the company needed about $8 billion on hand in case customers wanted to liquidate their remaining crypto deposits.

“I’m really sorry, again, that we ended up here,” Bankman-Fried he tweeted the manufacture.

FTX has been looking for ways to cover that $8 billion shortfall, but Friday’s bankruptcy shows that no white knight materialized. The cryptocurrency world initially believed that Binance would save the day, but its CEO, Changpeng Zhao, pulled out of a deal this week, citing FTX’s liquidity problems.

FTX now says the bankruptcy filing will allow the company to “assess its situation and develop a process to maximize recoveries for stakeholders.” Given FTX’s financial shortfall, however, it remains unclear how much investors who lost funds will be able to recoup.

Why do regulators investigate?

Both the Securities and Exchange Commission and the Justice Department are investigating FTX for possible violations, the Associated Press reported. Regulators are trying to determine whether employees at FTX’s trading arm, called Alameda Research, used client funds to make risky trades.

Such risks are scattered throughout the crypto industry, which remains unregulated in the US and many markets around the world. Underscoring its dangerous position, FTX posted this stern warning on its website on Thursday.

“Trading may be suspended on FTX US in a few days. Close any positions you wish to close.”

Securities regulators in Australia, Japan and the Bahamas have also launched investigations into FTX. The Securities and Exchange Commission of the Bahamas, where FTX is based, froze the company’s assets on Thursday and appointed a company to liquidate its holdings there.

“The Commission is aware of public statements suggesting that client assets were mismanaged, mismanaged or transferred to Alameda Research,” the agency said in a statement Thursday. “Based on the Commission’s information, any such actions would be contrary to normal governance, without the client’s consent and potentially illegal.”

Who is Sam Bankman-Fried?

Bankman-Fried is one of the two founders of FTX and was the CEO and public figure until his resignation on Friday. The son of two law professors at Stanford University, he graduated from MIT with a degree in physics and later moved to Hong Kong to start Alameda.

Bankman-Fried then moved to the Bahamas, where he founded FTX in 2019, just as cryptocurrencies began to gain the attention of average investors. After buying a number of brands a few years ago while cryptocurrency prices were still low, Bankman-Fried eventually saw his personal wealth reach $26.5 billion, according to Forbes.

Widely known as a vegan who loves to play League of Legends video games, Bankman-Fried has also gained a reputation for rescuing struggling crypto companies, earning him the nickname “crypto savior”.

FTX’s bankruptcy filing may end Bankman-Fried’s penchant for philanthropy — at least for now. The value of his 70% ownership of FTX’s US operations and his stake in Alameda-linked Robinhood markets have plummeted to $0, according to BNN. Bloomberg.

What happens next?

Filing Chapter 11 suggests that FTX plans to reorganize under court supervision and eventually emerge from bankruptcy. Until then, FTX employees will remain with the company and help the new CEO sort out the bankruptcy proceedings, according to statement.

FTX’s creditors will go to bankruptcy court to recover some of their money. A bankruptcy judge and trustee will determine which of FTX’s assets can be liquidated and then divide the proceeds.

FTX’s bankruptcy could also add momentum in Washington for lawmakers to pass cryptocurrency rules. The rumblings have already begun with Congresswoman Maxine Waters, D.-Calif., calling for oversight and SEC Chairman Gary Gensler telling CNBC on Thursday that he believes investors need better financial protection in the cryptocurrency space.

“The recent downfall of FTX.com – a major international cryptocurrency trading platform – is just the latest example in a series of incidents involving the collapse of cryptocurrency companies and the impact these failures have on consumers and investors,” Waters said in a a statement this. week.

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