Capping a week full of cray speculations, angry tweets, jaw-dropping revelations, and tumbling prices, many people were surprised by the collapse of FTX, but as more information comes to light, it appears that FTX's liquidity crisis started earlier than many believed.
The conflict between Binance and FTX, two cryptocurrency exchanges, has quickly developed and wreaked havoc on the market. Here is a summary of how it got started and why did this happen.
😂 made my day.#FTXbankruptcy #SBF_FTX #CZBinance pic.twitter.com/z1Ehimueuj
— 𝓜𝓾𝓱𝓪𝓶𝓶𝓪𝓭 𝓙𝓾𝓷𝓪𝓲𝓭 𝓗𝓪𝓲𝓭𝓮𝓻 🇵🇰 (@silents3a) November 13, 2022
What happened to FTX?
Source: Shutterstock
Given that it helped several lending companies during the cryptocurrency contagion in the second quarter of 2022, the cryptocurrency exchange's financial stability was never in doubt. However, things started to get out of hand in the second week of November.
FTX's status has been the subject of suspicions since at least Nov. 2. The issues related to Alameda's ownership of a significant amount of FTX's Token (FTT) (Sam Bankman-Fried, aka SBF, founded Alameda and co-founded FTX). It began with a report on the inconsistent market cap of FTT and the illiquid FTT holdings of Alameda Research. FTT tokens had a $3.35 billion liquid market cap, while Alameda had FTT holdings worth $5.5 billion in debt leverage and collateral.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.
— CZ 🔶 Binance (@cz_binance) November 6, 2022
By November 6, Binance had decided to sell a sizeable portion of its FTT holdings. On November 7, problems with FTX withdrawals became apparent, signaling a bank run.
Get your funds out of FTX. This is financial advice.
— Ran Neuner (@cryptomanran) November 6, 2022
On November 9, Binance expressed interest in purchasing the platform but rejected the offer due to uncertainties.
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.
— Binance (@binance) November 9, 2022
Things escalated; SBF resigned on November 11, and FTX, Alameda, and FTX US filed for Chapter 11 bankruptcy in the US. A total of 130 FTX Group companies have declared bankruptcy.
2) I'm really sorry, again, that we ended up here.
— SBF (@SBF_FTX) November 11, 2022
Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance to them.
Ultimately hopefully it can be better for customers.
Then the unexpected happened, Tether proactively blacklisted $31.4 million worth of USDT USDT tokens linked to the transactions after FTX confirmed via Telegram that it had been hacked.
According to blockchain analytics company Elliptic, a total of $477 million is believed to have been stolen, with the remaining funds being transferred by the platform itself into secure storage.
A common Ethereum wallet address that had amassed over 83,878.63 Ether (worth over $105.3 million) in just two hours starting at 2:20 am UTC on November 12 was the recipient of millions of dollars' worth of transfers from wallets connected to FTX.
Why did this happen to FTX?
You might be wondering now, what caused FTX to crash as the crisis engulfing the market deepened over the time? Well, the answer is because Alameda, Bankman-cryptocurrency Fried's hedge fund, decided to lend billions of dollars worth of customer assets to finance risky bets before it collapsed, according to a Thursday article in The Wall Street Journal.
The incident has undermined trust in the cryptocurrency sector and will give international regulators more confidence to tighten the noose. Some of the biggest names in the industry stated that they would welcome the scrutiny if it helped to rebuild public confidence in the sector.
