How did a company that was once valued at $32 billion capitulate so quickly? That’s probably what everyone watching the unexpected bankruptcy of FTX, a hot crypto startup that recently shut down, is puzzling over.
It will take time – and numerous federal investigations as well – to figure out what exactly happened to FTX.
However, here’s the simplest explanation: FTX let people and companies buy and sell digital currencies, holding billions of dollars’ worth of customer deposits. FTX’s founder, Sam Bankman-Fried, also created an investment fund that trades cryptocurrencies called Alameda Research. The businesses were supposed to be separate, but this year, Alameda needed cash and apparently dipped into FTX’s customer deposits. Then, this month, FTX customers became worried about their deposits and rushed to withdraw them, setting off a bank run and pushing FTX into bankruptcy.
The apparent commingling of funds between Alameda and FTX is highly suspicious and could lead to criminal fraud charges and lawsuits. The Securities and Exchange Commission and Justice Department are investigating. Let us find out what could be the consequences of the collapse of FTX, since it is more than just a financial disaster of a single person.
Cryptocurrencies made a big splash during the pandemic. Regulation has yet to catch up.
Cryptocurrency hype began to proliferate and get on the top. There appeared meme coins and NFTs that would skyrocket overnight, as well as sneakers that you could get cryptocurrency with, and many more. That got people chasing speculative investments over the past few years. But not everyone buying in understood the level of risk involved.
If a bank fails, the government might step in and bail it out. The cryptocurrency industry has no such privilege. Hacks of wallets and exchanges cannot be ruled out, the stolen funds cannot be recovered by simply calling the support service. Just as a bankrupt crypto exchange is unlikely to be able to ask for help from the state. Hence, crypto investors appear to have limited options to protect their assets.
Over the years, many investors have lost their savings due to market volatility or poorly chosen crypto projects. But FTX and Bankman-Fried stand out. He appeared on magazine covers, schmoozed regulators, grew his profile in philanthropy and politics and even sponsored a sports arena in Miami. He made hundreds of investments in smaller crypto projects and aggressively bailed out failing ones.
But Bankman-Fried made a point of fostering trust from investors, journalists, politicians and charities. Now he’s a pariah, and he brought all of the crypto industry under scrutiny.
FTX’s collapse is connected to the broader tech industry retreat.
FTX plummeted amid a widespread downturn in the technology industry. Stocks of tech companies are sinking as well. Venture capital funding is drying up. Nearly 800 tech companies have laid off more than 120,000 workers this year, with cuts hitting Meta, Amazon and Twitter.
The tough times in tech can be traced to interest rates for borrowing money. For more than a decade, rates were low, pushing investors to chase risk and pour money into high-growth tech companies. Now, rates are rising, just as the pandemic-fueled growth of the last two years fades. The rate increases have hurt tech company valuations and access to capital — including those focused on crypto.
There’s more to come.
FTX’s bankruptcy filings list more than one million creditors. In addition to people who used the platform to store their cryptocurrency investments and investors who backed the company directly, numerous funds and crypto start-ups had assets locked up there.
Investment managers that dabbled in crypto “should really be considering whether they should have relatively new, relatively unproven, relatively unregulated assets in their retirement plans,” said Marcia Wagner, founder of the Wagner Law Group, a firm focused on employee benefits. “There are certain types of assets that frankly don’t belong.”
Current state of the crypto-trading sector
The crypto market seemed to be at its worst even before the collapse of the FTX. Ever since reaching astronomical highs in November 2022, cryptocurrencies have been on the downfall, with Bitcoin going from $69,000 to around $18-20 thousand being a good example of it. But despite this, the main people who suffered from this crash were investors and not traders. A crypto market crash always brings huge volatility to the market, which gives traders the opportunity of making big profits with small capital.
The FTX collapse further fueled this volatility, and looking at it from a pure trading perspective it can be seen as something positive. Big volatility results in the prices of tokens jumping up and down throughout the day and a big number of traders are taking advantage of this. With traders using free crypto trading apps such as Bitcoineer, these traders are looking at the market and trading according to the trend of the day. If traders see that everything is down, most traders use short positions, while if they see that big tokens are showing greens, they open long positions to gain profits. So we can say with confidence that day traders are the ones who benefit most from this FTX collapse.
At first glance, the bankruptcy of what was once one of the largest cryptocurrency exchanges can affect only those who worked and traded on it. Still, this particular event will affect the entire crypto community. From now on, crypto investors and companies will be more careful in picking the projects they are willing to invest in.