FTX, the world’s second-largest crypto exchange, fell into crisis and triggered another huge crypto crash.
Here we look at what has happened to FTX, why, and what it means for the rest of us.
One of the crypto industry’s most popular figures Sam Bankman-Fried had it all.
Listed in Forbes 30 under 30 as the world’s richest 29yr old, Sam became a billionaire in just 3.5 years of trading cryptocurrency and went on to found FTX crypto exchange.
Earlier this year FTX raised $400 million to reach a $32 billion valuation, and only last month it was talking about ambitious acquisition plans, the company seemed very strong.
But the first week of November saw FTX suddenly suspend customer withdrawals which has often signaled the collapse of crypto platforms. Within days CZ the CEO of Binance announced on Twitter that FTX had “asked for our help” and a rescue deal had been reached.
After 2022 has seen trust in crypto companies torn to shreds by the collapse of Three Arrows Capital (hedge fund), lender Celsius(lender), and Terra-Luna(stablecoin), another big capitulation was the last thing the industry needed. With Binance offering to help, we first thought FTX may have found a way to avoid a crisis.
But a hammer blow was dealt when CZ tweeted that the deal was off, due to discrepancies and reports of existing US investigations into the mishandling of customer funds at FTX.
Binance (The world’s largest crypto exchange) walked away from a deal to acquire its troubled competitor, leaving FTX with a surge of withdrawals headed towards breaking point.
Previous bad blood
Binance was an early investor of FTX, but the relationship became troubled last year when Binance sold its stake for $2.1 billion worth of FTT (a token launched by FTX).
After parting their separate ways, a rift began to form between Bankman-Fried and CZ, as they had differing views towards regulating crypto.
Panic began last week when a report from CoinDesk, appeared to show that the balance sheet of Alameda Research (FTX’s sister company), was choked up with billions of dollars in FTT tokens.
This raised serious questions about FTX and Alameda’s financial exposure to FTT, which cannot be readily turned back into cash and left them open to attack.
Sharks began to circle
The response came fast with CZ announcing to the world “Binance would sell off its entire FTT holding”.
He claimed the intention was to sell “in a way that minimizes market impact,” but in reality, it was obvious that announcing publicly the sale of such a large amount of FTT would immediately dump the price and trigger a sell-off.
Within hours the token has lost almost 90 percent of its value and a surge in withdrawals began at FTX as customers began to panic about the safety of their crypto.
CZ has denied deliberately creating a liquidity crisis at FTX when he said “I spend my energy building, not fighting,” but Tim Mangnall from Capital Block (previously consulted for both Binance and FTX), said this was a “shrewd” business maneuver by CZ, as it allowed him to “buy one of his biggest competitors for pennies on the dollar.”
Binance went on to officially reject that takeover deal. This crisis at FTX likely reinforces its rival’s position as the world’s largest cryptocurrency exchange. Binance was already larger, by trading volume, than all of it’s closest competitors (Coinbase, Kraken, OKX, Bitfinex, Huobi, and FTX) combined.
Coming out of this CZ and Binance will likely have far greater influence in crypto and become the center of debates around policy and regulation.
For the community that begs for more decentralization in crypto, the merging of customers from of the world’s 2 largest exchanges is not good. Decentralization is all about eliminating single points of failure and distributing power as widely as possible but the fall of FTX pushes this further away.
In a time when many hope to prove crypto safer than banks, this situation has caused more loss of confidence in the whole crypto industry at large.
Where do we go from here
The failure of FTX has raised questions about what measures should be in place to protect crypto owners in the future.
CZ has proposed:
Brian Armstrong, CEO of Coinbase, expressed sympathy for FTX and also stated:
Here at The Pulse we see this as yet another reminder to never store your wealth with exchanges.
Rule #1 – Not your keys, not your crypto
If your crypto is not in a wallet that you control, then you do not have ownership.
Consider getting yourself a cold wallet and never leave large amounts of crypto on an exchange for more than 7 days.
Another huge player in the crypto game has fallen to their knees, we can only hope that lessons will be learned and we get stronger from here. For more information on this, check out our guide to avoid getting rekt in the bear market.
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