In the span of a week, FTX faced challenges and a wave of withdrawals that left it vulnerable and bankrupt. Its chief executive, Sam Bankman-Fried, resigned from his post on Friday.
After the booming industry that 2020 and 2021 meant for the cryptocurrency market, 2022 looks like the debacle. FTX, a cryptocurrency exchange valued at $32 billion earlier this year, has gone from heaven to hell in the investment world, taking many investors with it. This Friday, the company recognized in the digital currency market began bankruptcy proceedings in the US, while evaluating the value of its remaining assets, according to a company announcement.
In the announcement, it was added that Sam Bankman-Fried, 30, a prominent crypto entrepreneur and CEO of FTX, resigned on Friday. Previously, Bankman-Fried had apologized saying that he “should have done better.”
Although the collapse had been brewing for a few weeks, it was in the last week that the last nails were put in the coffin of FTX. The financial instability that the company was already showing caused many users of the platform to join a wave of withdrawals for billions of dollars that left the company helpless. FTX lacked sufficient funds to pay sellers and temporarily suspended withdrawals. On Thursday, the company reopened the dynamics to some users, reported CoinDesk, the specialized cryptocurrency news outlet.
“The immediate relief of Chapter 11 is appropriate to provide the FTX Group with an opportunity to assess its situation and develop a process to maximize recoveries for stakeholders,” John J. Ray III, the newly appointed CEO, said in a statement.
This debacle only adds to one of the most difficult years for crypto assets in recent times. Beyond the financial problem of FTX, the value of bitcoin has plummeted by more than 60%.
In an interview with CNBC, Gary Gensler, head of the Securities and Exchange Commission, pointed out that these events are a call to strengthen the crypto regulation that has been announced so much in the United States, but in which nothing has materialized.
“Investors around the world are being hurt,” Gensler said.
According to a recent CNBC report, it is estimated that the cryptocurrency industry has faced losses of approximately $2 trillion dollars, going from a capitalization of around $3 trillion dollars to $900 billion today.
FTX is just one more victim (along with its entire plant of investors) of these losses.
What caused FTX to go bankrupt?
The drop occurred in almost a week, when CoinDesk published that it found that a significant part of the assets of Alameda Research, a cryptocurrency hedge fund also founded by Bankman-Fried, consisted of FTT, a token created by FTX (company with which he worked closely with), which allows users of the exchange to access discounted trading rates. FTT is relatively illiquid, raising fears among some about the capital reserves at Alameda Research and, consequently, FTX.
“The basic risk is that if other investments in Alameda went under, and many crypto investments have been going down in recent months, they may not have been able to return the funds to the exchange,” said David Yermack, a finance professor at the New Stern School of Business of the University of York, to ABC News.
In response to the CoinDesk article, Changpeng Zhao, the CEO of rival crypto exchange Binance, said on Sunday last week that he would sell the company’s FTT worth $580 million.
The sheer weight of the departure of a giant cryptocurrency company triggered a wave of withdrawals with a larger liquidation totaling around $5 billion in a single day. FTX couldn’t handle the immense pressure to meet the sudden demand for money.
“It’s a lot like a bank run where there were rumors that essentially FTX’s reserves weren’t big enough to meet customer demand,” Yermack said. “People started lining up in large numbers to try to make a withdrawal of funds and deposits on the exchange.”
FTX stopped client withdrawals. On Tuesday, FTX reached an agreement to be sold to Binance, the cryptocurrency exchange whose executive had helped trigger the sell-off. However, Binance pulled out of the deal the next day, leaving FTX adrift and currently bankrupt. Despite all this circumstance, FTX on Thursday reopened withdrawals for some of its users.
What does the FTX bankruptcy mean for my cryptocurrency investments?
As in this type of situation, the direct and collateral damage can be serious for those who invest in cryptocurrencies.
As direct damage are all the people who put their money in FTX and who run the risk of losing their capital. If FTX is not sold to a different firm, as it tried to do with Binance, so that it becomes responsible for covering the losses and redefining the destination of millions of people’s money, the Chapter 11 bankruptcy in the US could do more than defining the fact that cryptocurrency traders who cannot withdraw funds from FTX potentially lose their money.
As for collateral damage, the collapse of companies like FTX and Voyager Digital a few months ago offer a warning to crypto traders and investors. Although one of the main characteristics of these digital assets is the exception of a central entity, the possibility of regulation in the country would be closer.
Many experts have pointed out the strong volatility that governs cryptocurrencies, alerting investors. However, the popularity and hope of profits and of a recovery in the distant future continues to cause people to put their money in, hoping that its main characteristic, volatility, will make them millionaires.