How Did FTX Collapse In Nine Days?

Posted on Thursday, December 22, 2022 by Lydia SinclairNo comments

The story of the collapse of the cryptocurrency exchange FTX has been compared to the fall of Enron and highlighted the importance of forensic accounting jobs to protect people and prevent wrongdoing in a fundamentally changed cryptocurrency world.

However, much like with Enron and other companies that collapse so quickly and so fundamentally, the reasons behind the collapse take far longer to investigate than the original collapse took to happen.

Whilst there is still a lot to investigate about FTX and its former CEO Sam Bankman-Fried, here is the timeline as is currently understood about how a company and a person once compared to JP Morgan fell so suddenly and so completely from grace.

 

What Was FTX?

FTX was, up until the start of November 2022, the third-largest cryptocurrency exchange by volume, behind Binance and Coinbase, the former of which plays a major role in the story later.

The start of the company was through a technically separate cryptocurrency trading firm known as Alameda Research, which primarily made its initial millions from arbitrage, buying Bitcoin in the United States and selling it for a higher price in Japanese exchanges.

A year after this, Futures Exchange was formed, with the stated aim of making investing in crypto easier for people who were less financially or technologically knowledgable, as well as offering incentives to trade in its dedicated investment token FTT.

At its peak, the company was valued at over $30bn, but in just over a week, the entire house of cards collapsed.

 

Nine Days Of Disaster

On 2nd November 2022, the cryptocurrency news website CoinDesk reported that Alameda Research had a significant portion of its own assets held in FTT, which was seen as a concern because of Mr Bankman-Fried’s stake in both Alameda Research and FTX, the company that distributes FTT.

The numbers did not add up, which started to concern investors and made forensic accountants take notice of the emerging story.

Four days later, Changpeng Zhao, CEO of rival exchange Binance as well as someone who has had arguments with Mr Bankman-Fried over regulation in cryptocurrency, announced that Binance would sell off all of its FTT holdings.

This led to a bank run worth $6bn that immediately plunged FTX into a liquidity crisis, as well as causing the entire crypto market to significantly fall in value from $3tn to $800bn.

In a world of trouble caused in part by Binance, FTX and the former agreed to a sale largely to help protect customers and ensure they could get their assets back.

This sale ended just as quickly as it began after revelations that FTX had used billions of its customer funds (against its own terms of service) to help bail out Alameda Research.

Once Binance had pulled out of the deal, Mr Bankman-Fried tried to raise $10bn in emergency funds, but on 11th November, FTX, FTX US, Alameda Research and over 100 affiliated companies filed for bankruptcy.

As of December 2022, over a billion dollars could not be accounted for, and the current CEO during the bankruptcy proceedings, John Ray III (the man who oversaw the liquidation of Enron) has described the situation as a “complete failure” of providing trustworthy financial information.

Ultimately, FTX turned out to be a skyscraper built on sand, and once other collapses such as Terra-Luna and Celsius started to affect the market, FTX’s high level of liabilities and lack of liquidity would leave it exceptionally vulnerable.

 
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