In the blink of an eye, FTX Trading goes from crypto boom to bust

Until recently, FTX Trading was the toast of the cryptocurrency world.

In 2021, the company’s revenue skyrocketed by more than 1,000% to $1 billion as it capitalized on public interest in the potential of digital currencies to build wealth. FTX also trumpeted its brand with splashy Super Bowl ads featuring quarterback Tom Brady and comedian Larry David. To underline its meteoric rise in the corporate world, the company bought the naming rights to the American Airlines Arena in Florida for $135 million and renamed it the FTX Arena.

A year later, FTX now finds itself on the brink of bankruptcy, facing billions of dollars in losses and a federal investigation. The company’s meteoric rise and sudden plunge — along with the fate of its respected founder and CEO, Sam Bankman-Fried — resemble nothing less than the dizzying swings of cryptocurrency itself.

A deal gone bad

The rapid turnaround in FTX’s fortunes has shocked the cryptocurrency world. On Tuesday, the CEO of rival crypto exchange Binance, Changpeng Zhao, said his company had reached an agreement to acquire FTX. But he dropped the move a day laterand raises questions about FTX’s financial viability.

In a subsequent call with investors, Bankman-Fried said FTX needed about $8 billion to back up crypto assets users have on the platform, Bloomberg News reported. He also said that without an imminent infusion of cash, the company may have to file for bankruptcy, according to Bloomberg.

FTX did not immediately respond to a request for comment. Bankman-Fried tweeted Thursday that FTX is “using the week to do everything we can to obtain liquidity”.

“Every penny of that – and of the existing security – will go straight to the users, unless or until we do right by them,” he tweeted.

A bankruptcy of the world’s third-largest crypto exchange would shake up an industry that has long attracted unwanted attention from financial regulators and lawmakers, experts told CBS MoneyWatch.

“This is going to be a psychological shock to the industry to say $8 billion worth of client funds are gone,” said Josh Peck, an expert on crypto risk. “It’s a big deal. People are going to be skeptical. [and] they’re going to say things like bitcoin is over.”

Compounding FTX’s problems, the US Securities and Exchange Commission is now investigating the company for possible violations, the Associated Press reported. Regulators are trying to determine whether employees at FTX’s trading arm Alameda Research used customer funds to place risky bets on the market.

Flooding of withdrawals

FTX’s liquidity problems started months ago when Bankman-Fried said he used incorrect data to create the company’s financial projections.

In a series of apologetic tweets, the CEO said he had mistakenly believed the company had enough cash on hand to pay 24 times the amount users typically withdraw in a day; in fact, FTX only has enough cash to pay 0.8 times the amount – a dangerously risky cushion for a crypto exchange. The miscalculation came back to haunt FTX last weekend in a flood of user withdrawals.

“Because, of course, when it rains, it rains,” Bankman-Fried tweeted. “We saw about $5 billion in withdrawals on Sunday — the largest by a huge margin.”

A big crypto sale that started late last year is also partly to blame for what is now happening at FTX. Popular tokens such as bitcoin, ether and ripple have all lost value in recent months, causing damage to sites like Celsius and Coinbase.

In response to the crypto crisis, FTX lent $500 million to Voyager Digital in June, hoping to help the crypto-lending platform weather a longer-than-expected downturn, CNBC reported. The move proved to be costly for FTX as Voyager Digital filed for bankruptcy a month later, and FTX later paid $51 million to buy out Voyager.

FTX suffered another financial blow when Binance offloaded its remaining FTX tokens, called FTT, which it received as part of its $2.1 billion exit from FTX last year.

““Due to recent revelations that have come to light, we have decided to liquidate the remaining FTT on our books,” Zhao tweeted on Sunday.

Bankman-Fried did not mention the bankruptcy in his tweets, but he vowed to do right by the users. However, FTX suspended withdrawals on Thursday, a move that Peck said hurts customers even if the company does not go bankrupt.

Despite the likely industry shockwaves if FTX collapses, the crypto sector has about a dozen other “high-quality” exchanges to absorb demand, Peck said. The value of most cryptocurrencies probably won’t budge either — with the exception of one, he said.

Alameda Research owns a large amount of solana, and a bankruptcy would likely freeze these coins for an unknown period of time.

“It will still be a tragic circumstance because customers of FTX will have lost a lot of money,” Peck said. “But ultimately the industry will adapt to this.”