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What Is FTX?

FTX, for those unaware, was a crypto exchange with a built-in digital wallet. FTX allowed you to buy or sell crypto and store crypto in a wallet (like other exchanges). At one point, FTX was the 3rd largest crypto exchange by volume of transactions.

Around late-October and early-November last year, FTX declared bankruptcy and their CEO, Sam Bankman-Fried, and other top executives resigned.

So what happened to FTX?

FTX’s Business Model

To figure out what happened to FTX, a baseline understanding of FTX’s business model is necessary.

FTX, like other exchanges, make money by taking a cut of crypto exchanges (i.e. when people bought or sold crypto). This was quite a significant amount, too: in 2021, FTX had a revenue amount of 1.02 billion USD.

FTX also made money, more importantly, using the “flywheel” model popularized (or revealed) by another crypto-related company, Celsius.

FTX created their own coin (called FTT), and whenever they made money, it was spent in buying more of the FTT token. This meant that the price of the FTT token was inextricably linked to the profits of the company.

Also, the huge amounts of FTT owned by FTX could be shown as assets, so whenever they spent in buying FTT, it seemed as if their valuation grew (as FTT’s price, and therefore the value of their assets, grew). This helped them gain massive amounts of direct investment, with them raising 1.8 billion USD over 7 rounds of funding.

But, this does have a significant downfall. Since all the money is basically locked up in FTT token (and to some extent, other tokens Bankman-Fried was invested in like Solana), it is basically completely illiquid. Also, since FTT held almost all of FTX’s money, if its price ever crashed (for example, in case of a bank-run for FTX), they’d lose all their money.

What Actually Happened?

First, let’s talk about Alameda Research.

Alameda is (or rather, was) a hedge fund created by Bankman-Fried, which lost a lot of money doing risky trades.

This is important, since FTX would basically send money into Alameda, which would invest this money into FTT and Solana (as previously stated). Of the 10 billion USD sent to Alameda, around 1 billion USD is missing. This money was money of FTX’s customers.

Anyway, a report by CoinDesk (linked) revealed Alameda’s balance sheets, which showed the amount of money they had invested in FTT (and other tokens). It showed that Alameda would take out loans and put up the FTT token as collateral.

The amount of money Alameda had locked up in FTT is crucial because they held 50% of all FTT token in the market.

So after this, CZ, the head of Binance (a rival crypto exchange) saw this as an opportunity and announced that Binance would liquidate all of its holdings in FTT (and this pushing its price down). Since in the crypto world monetary insurance is absent, even the slightest risk of losing all your money could prompt a bank run (since the trading fees associated with pulling out all your money is of course a lot smaller than the hypothetical amount of money you would lose if the company, in this case FTX, went under).

And so, the risk of FTX’s assets declining in value prompted a bank run, and tons of money was withdrawn from FTX. Since most of FTX’s assets were locked up in illiquid assets that were rapidly depreciating, a la FTT, they didn’t even have the money to give to people, and they had to stop withdrawals.

Binance also initially committed to acquiring FTX (but pulled out at the last second, prompting even more withdrawals).

Finally, FTX declared bankruptcy.

Why It Was Such a Big Deal

1. Prices of crypto: Prices of even major currencies like Bitcoin and Ethereum fell massively (26% and 33% over four days, respectively).
2. Public perception of crypto dwindled, especially considering FTX was the “golden boy” of crypto and most people didn’t even think that it was possible for FTX to go under.
3. Crypto advertising: FTX advertised a ton into crypto, managing to sponsor a ton of finance creators and huge celebrities, as well as become the title sponsor for the Miami Heat’s arena and the main sponsor of esports team TSM. As a fallout of this, many businesses lost a ton of money, and the finance YouTubers who were sponsored by FTX were hit by a $1 billion class-action lawsuit.

This was a little bit of a different blog post, I hope you liked it!

Honestly, I don’t know if what I wrote is entirely correct (since this whole scenario is so incredibly complex and I honestly just don’t know enough), but I hope my preliminary understanding is at least vaguely accurate.

Sources:

Coffeezilla: FTX Collapsed… Here’s Why:

Legal Eagle: FTX Was (And Is) A Complete Mess:

CoinDesk report on Alameda: https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/

Dirty Bubble Media’s Report on Alameda:

Is Alameda Research Insolvent?

Sam Bankman-Fried, better known as SBF, has a reputation for being the smartest guy in the room. The crypto billionaire controls both one of the largest crypto hedge funds, Alameda Research, and one of the largest crypto exchanges, FTX. He has appeared in the thick of multiple crypto company failures, bailing out cryp…

Dirty Bubble Media

Thanks for reading!