The collapse of FTX demonstrated a huge level of mismanagement and liquidity default. It shook the crypto industry and caused a wave of fallout in November 2022.
The fall started with a headbanging event when a CoinDesk report uncovered unpleasant business relationships between FTX and Alameda Research, a trading company owned by the same founder, Sam Bankman-Fried.
Alameda owned substantial quantities of FTX’s own token, FTT, which investors found had been overvalued by a company they controlled. This disclosure cast doubts on the financial well-being of FTX and led to a client outflow.
To make matters worse, Binance, the largest competitor of FTX, said it would sell its $580 million in FTT tokens.
This ruling dropped the FTT value to the floor. FTX also soon ran out of liquidity to meet the withdrawal demands as customers scurried to get their money.
A bailout initially seemed promising, but Binance’s withdrawal cut it short, and FTX ultimately filed for bankruptcy on November 11, 2022. Sam Bankman-Fried left the scene in the melee and, in a statement, said, I went wrong.
Mismanagement and Financial Punishment.
Bankruptcy CEO of FTX, John J.Ray III, called the fall of the exchange the worst that he had ever witnessed.
His review revealed disastrous lapses in corporate governance and financial controls, implying poor management on a scale never experienced.
Reports revealed that FTX commingled customer funds with Alameda, which had also suffered heavy losses, resulting in an estimated $8 billion shortfall in customer deposits.
This poor management was not limited to money matters. Sam Bankman-Fried supposedly spent customer money on personal costs, extravagant campaigns, and politician donations, which makes him potentially have committed fraud.
Law enforcement in various jurisdictions initiated investigations, and federal prosecutors sought the indictment of Bankman-Fried and some of the executives.
Aftershocks and Industry Effect.
The FTX meltdown had broken the trust in the cryptocurrency industry, and the event caused a chain reaction of panic sell-offs and liquidity ruptures in other companies.
Prices of cryptocurrencies, Bitcoin and Ethereum, fell drastically. Some companies halted their withdrawals in panic over insolvency, and others went bankrupt.
In a move to stabilize the market, Binance established an industry recovery fund to support the impacted projects.
Nonetheless, millions of investors suffered huge losses as a result of the incident. The Ontario Teachers’ Pension Plan, which is an institutional investor, wrote off tens of millions in investments, illustrating the scope of the blowout.
Nevertheless, infrastructure and numerous analysts feel that blockchain technology, as well as crypto, will survive the shock, with the same comparison to the previous financial crises that ultimately resulted in a firmer industry base.
