​FTX’s collapse. What implications await the crypto market

The sudden transformation of FTX exchange CEO Sam Bankman-Fried from superstar to new culprit in the collapse of the crypto market has dealt him a serious blow, leaving traders and investors shocked at the speed of what is happening and the crash of one of the cryptocurrency industry’s first brands.

FTX and Alameda Research, Bankman-Fried’s crypto exchange and trading firm, respectively, were considered some of the cryptocurrency market’s most trusted stars just a week ago. Bankman-Fried has built a solid reputation and image as the savior of the bankrupt crypto companies that failed to survive the collapse of the Terra ecosystem this summer. FTX gained popularity by spending millions on a high-profile ad campaign that included, for example, renaming the NBA Miami Heat stadium into FTX Arena in Miami. The exchange is also famous for being supported by big investors, including SoftBank, Tiger Global, and BlackRock.

However, on Tuesday, November 8, when concerns about the financial health of Alameda led to FTX customers massively demanding the return of their deposits from the exchange. According to several sources, the amount of funds requested is estimated at $6 billion. The FTX exchange was founded in 2019 as a platform “for traders by traders,” when Alameda already existed. Since FTX’s inception, there has been speculation in the community about the relationship between the companies.

That same day there were problems with withdrawals. Bankman-Fried was silent for a while, but later released a statement on Twitter, which acknowledged the problems with liquidity. At the same time, the head of the largest crypto exchange Binance announced that his company was acquiring FTX and would provide funds to cover a debt incurred by the exchange to customers whose money was stuck on deposits. The news of the deal came as a shock even to crypto industry veterans. Just hours before the announcements, many experts with reputations in the crypto market openly said that FTX’s insolvency was impossible.

What was the reason

On Sunday, Changpeng Zhao said that his crypto exchange decided to sell its holdings of FTT coins, the native tokens of the FTX exchange, of more than $500 million because of “recent revelations that have came to light.” The decision followed a CoinDesk article that Alameda was holding billions of FTT tokens on its balance sheet, using them as collateral against $8 billion in liabilities. This chain of events triggered a massive user capitulation.

Binance vs FTX: How the confrontation between two crypto giants arose. A detailed timeline of events before the takeover of the exchange

Nothing has been proven yet, and it remains to be seen what exactly triggered the liquidity crisis and the lightning crash of FTX. Alameda probably received FTT tokens on preferred terms, and when their price rose, used them as collateral, taking user funds from FTX accounts. That could have worked for a long time before the FTT price would have collapsed, which is what led to Binance’s decision to sell off its assets. Some analysts put forward their own version of events based on on-chain analysis.

The price of the FTT token fell from $22 to $4,2 in 24 hours at the time of publication.

What’s next

Events continue to develop. On November 9, CoinDesk wrote, citing its own sources, that after reviewing internal documentation of FTX, Binance management is inclined to reject the deal, but there was no official confirmation.

In an open letter to Binance employees, Zhao said that he did not consider the takeover of the competitor a winning event. “Regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get, he warned in the letter.

Zhao told employees not to sell a bag of FTT on the exchange’s balance sheet and recommended that those with positions in personal accounts refrain from trading the token. According to him, the due diligence for the deal with FTX is ongoing. He says openly that he could still refuse to make an acquisition decision on FTX. Earlier in a tweet, Zhao hinted at his speculation about what went wrong at FTX. “Never use a token you created as collateral. Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve,” recommends the head of Binance.

After the collapse of FTX, Binance and other major crypto exchanges pledged to release evidence that they keep their customers’ funds in safe reserves and that they are readily available for withdrawal. Zhao acknowledged in the letter that the FTX takeover, making Binance the largest crypto exchange in the world, would “paint a target on the back” of the company. “And people now think we are the biggest and will attack us more,” Binance’s CEO wrote.