Why Bitcoin and Crypto are in crisis today
FTX.
Hard to ignore these three letters these past few days. You probably live on another planet if you haven’t seen or heard them on the news.
A little catch-up: These letters are the name of a major player in the cryptocurrency industry, a player that imploded overnight.
Until its implosion on November 8, FTX, an exchange where you could buy and sell cryptocurrencies like bitcoin, was considered one of the most financially sound companies in the world.
In February, FTX was worth $32 billion. CEO and co-founder Sam Bankman-Fried, 30, was one of the richest men in the world with a fortune worth $15.6 billion. It is now obliterated.
What happened?
As a crypto exchange, FTX executed orders for its clients, took cash and bought cryptocurrencies on their behalf. FTX acted as a custodian and held the customers’ cryptocurrencies.
FTX then used its clients’ crypto assets, through its sister company’s trading arm Alameda Research, to generate cash through loans or market making. The money that FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX used the cryptocurrency it issued, FTT, as collateral on the balance sheet. This represented a significant exposure due to the concentration risk and volatility of FTT.
As soon as this exposure came to light, clients, fearing an FTX collapse, rushed to liquidate their crypto positions and get their money back. On November 6, customers withdrew a record $5 billion, Bankman-Fried reported on November 10. There was a run on the stock exchange. This led to the insolvency of FTX, as it had no crypto-assets, now lent or sold, to honor its customers’ sell orders.
Why does the FTX collapse threaten the entire industry?
FTX is a major player. Last summer, when many crypto firms faced liquidity crises, it was Bankman-Fried who emerged as a savior. He lent money to many of them, to save them from bankruptcy.
The list includes the who’s who of the cryptosphere: Robinhood, BlockFi and Voyager Digital, to name a few.
The former billionaire was also a shareholder in many companies.
His influence also extended to sports where NFL star Tom Brady and NBA star Stephen Curry were shareholders in FTX.
Many large investors had also invested in FTX: BlackRock, Sequoia Capital, Softbank, Tiger Global, Insight Partners and Paradigm.
The fall of FTX will affect many businesses outside of the crypto industry.
