FTX’s rise and fall: how a successful story unexpectedly ended up with one of the largest failures in crypto world
Until recently, the multibillion-dollar Bahamas-based exchange FTX positioned itself as a safe and easy way to get into crypto. Not so long ago, FTX was managing about $US15.4 billion ($23.3 billion) through its systems, and venture capitalists were comfortably happy with the company’s latest $US32 billion valuation.
Over the past two weeks, a series of revelations and moves led to the collapse of FTX. On the 10th of November the cryptocurrency exchange suspended on-boarding of new clients as well as withdrawals until further notice. A bit later FTX filed for bankruptcy and its chief executive, Sam Bankman-Fried, resigned.
But let us go back in time to see how the story of SBF (this is how the guy is known among crypto community) and FTX was unfolding from the beginning.
Sam Bankman-Fried founded the trading firm Alameda Research in 2017, just a few years after graduating from MIT. In 2019, he founded FTX, which rode a bull market for crypto to an $18 billion valuation in July 2021, securing investments from the likes of Softbank and Sequoia Capital. It spent millions of dollars lobbying U.S. legislators to institute crypto-friendly regulation.
Short for “Futures Exchange,” FTX was launched off the reputation that Alameda Research had built in the industry as one of the biggest crypto traders by volume. Its stated focus was derivatives, leveraged trading and a professional approach with a goal to “move the derivatives space toward becoming institutional grade.” A notable early investor was Binance founder and CEO Changpeng Zhao, but the relationship reportedly soon soured, and his stake in the company was sold back in 2021. CZ’s familiarity with FTX and SBF played a pivotal role in triggering the current debacle.
The firm saw early success arbitraging the price of bitcoin between different markets. As it grew, it ventured into other sorts of trades and made dozens of investments into crypto projects.
FTX was operating an international exchange out of the Bahamas. A separate entity, FTX.us, was set up in 2020 to legally service US customers. By 2021, FTX became the second largest crypto exchange behind only Binance, worth some $30 billion before it all started to unravel. Notably, the relationship between Alameda and FTX had been a popular subject of speculation before beginning to leak earlier this month.
The news leaks that FTX token FTT makes up a huge portion of quant firm Alameda’s balance sheet.
Thus, a large amount of the trading firm’s assets appeared to be held in the FTX native token FTT. Essentially, billions of Alameda’s value could be traced to a cryptocurrency created by the sister company FTX. Each FTT token was worth around $25.50 at the time. Basically, Alameda research, the trading firm founded by Bankman-Fried, was borrowing billions of dollars from FTX users’ accounts and trading those funds without their knowledge. FTX also drastically underestimated how much money it would need to keep on hand in case a user wanted to cash out.
The filing follows reports that FTX used deposits to pay Alameda Research creditors, a claim reportedly made by former Alameda Research CEO Caroline Ellison during a call in early November. Bankman-Fried said he was not aware that was true but said Alameda had a large position open on FTX that was “overcollateralized a year ago.” SBF, Ellison and representatives from Binance, FTX, FTX.us and Alameda didn’t immediately respond to requests for comment.
Rumors began that the employees were fleeing the company’s Bahamas site, besides a number of investors tweeted about their inability to get funds out of the exchange. Bankman-Fried told the staff in a memo that he was seeking a capital raising and had held talks with Justin Sun, the founder of Tron, a blockchain DAO ecosystem.
CZ announces Binance will sell off its substantial holdings of FTT. Fifteen minutes later, Ellison responds that Alameda would like to buy the tokens from Binance at $22 each. The price of the token begins to fluctuate almost immediately, dropping to less than $6, and CZ reveals that Binance has entered into a non-binding agreement to purchase FTX completely. Crucially, the buyout pends on a due diligence check of FTX’s financials. Therefore, Binance announced it had to back out of a plan to acquire it.
FTX’s new chief executive, John Jay Ray III, said in a bankruptcy filing that he had never seen “such a complete failure of corporate control”, and this man have seen a lot of financial mess. Mr. Ray had helped manage the aftermath of some of the largest corporate collapses in history, including the implosion of Enron in 2001. The chief executive also described numerous corporate missteps, including the use of software to “conceal the misuse of customer funds.” Mr. Ray also stated in the filing that he could not trust that financial statements assembled under Mr. Bankman-Fried’s leadership were accurate.
Later on the same day, FTX was hacked and over $300 million was moved off the exchange. The exchange advised users to delete its mobile app. Bankman-Fried later blamed an “ex-employee, or malware on an ex-employee’s computer” for the theft. Sam Bankman-Fried, 30, ultimately blamed the collapse of FTX on his struggle with risk management, saying: “If I had been spending an hour a day thinking about risk management on FTX, I don’t think that would have happened. And I don’t feel good about that.”
The Bahamian authorities — where the company is headquartered — froze all FTX accounts and began legal action against Sam Bankman-Fried. SBF announced that Alameda Research was going to shut down. Some investors wrote off their multimillion-dollar investments to zero. The savings of hundreds of thousands of customers who deposited their holdings on the FTX platform became jeopardized. According to the reports, at least $1 billion in FTX customer funds can’t be accounted for. Mr. Ray’s team immediately managed to secure about $740 million worth of cryptocurrency belonging to parts of FTX’s business, a sum he called “only a fraction” of what he was hoping to recover.
The US House Financial Services and Senate Banking committees announce they will hold hearings into the implosion of FTX in December. In the recent remote interview the founder of the now-bankrupt crypto exchange FTX denied “knowingly” commingling customer funds with those held by Alameda Research, his proprietary trading group. Regulators require trading platforms to hold enough money to match what customers deposit. And trading customer funds without their explicit consent is illegal, according to U.S. securities law.
So far, the cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy. Without a doubt, the collapse of FTX will have a domino effect on the overall crypto industry that may finally make cryptocurrency too risky and unreliable for ordinary people to invest.