What happened with FTX?
FTX is a crypto exchange that was founded 2019 by Sam Bankman-Fried for the purchase and sale of various cryptocurrencies with ‘low fees’ has been all over the news, as they recently filed for bankruptcy.
One of the platforms catchphrases was ‘built by traders, for everyone.’ The site offered a wide range of financial products such as industry first derivatives, options, volatility products leveraged tokens etc.
At its peak in 2021, FTX was the third-largest crypto exchange by volume.
FTX’s main selling point was that the platform was robust enough for professional trading firms and intuitive enough for first-time users. The FTX brand was focused on legitimacy, the brand stating that they worked with regulators to ensure transparency and reiterating its trustworthiness by working with brand ambassadors such as Tom Brady- famous footballer and a household name in the US.
Public concerns began when a November 2022 CoinDesk article stated that FTX's partner firm Alameda Research (a Trading firm also founded by Bankman in 2017) had a sizeable portion of its assets in FTX's native token FTT- this meant that Alameda was positioned to gain financially when the lay man lost money. Alameda was a ‘market maker’- the firms’ activities could influence the price of tokens. This was a regulatory oversight, as companies in the traditional equities market aren’t allowed to do this.
According to anonymous sources cited by The Wall Street Journal, FTX had lent $10 billion of its customer assets to Alameda Research in 2022, and Alameda CEO Caroline Ellison disclosed to other Alameda employees that she, Sam Bankman-Fried, Gary Wang, and Nishad Singh knew about that decision.
Ellison said the funds were used in part to pay back loans Alameda had taken to make investments. FTX used software to conceal the misuse of customer funds. – Bankman borrowed customer money from the exchange to make more money, while conducting insider trading and building a backdoor into the exchange unknown to auditors and regulators.
In October 2022, it was also reported that FTX was under investigation in Texas for allegedly selling unregistered securities
Following this revelation, rival exchange Binance's CEO Changpeng Zhao announced that Binance would sell its holdings of the token, which was quickly followed by a spike in customer withdrawals from FTX- people didn’t trust the exchange anymore.
FTX then became unable to meet the demand for customer withdrawals. Binance signed a letter of intent to acquire the firm and to ensure that customers could recover their assets from FTX in a timely manner, but withdrew its offer the next day, citing reports of mishandled customer funds and a U.S. agency investigation
The exchange went from a $32 billion valuation to Chapter 11 bankruptcy proceedings in the US court system within a week and Bankman has released an apology letter to FTX employees, but unfortunately, this doesn’t undo the damage that has been done.
There are more details to follow, but to cut the long story short: people couldn’t withdraw their money from the platform, Bankman was allegedly siphoning users’ money to make money for himself, which lead to the firm filing for bankruptcy.
Random Fun facts about FTX and Sam Bankman-Fried
-Sam Bankman-Friend’s parents (Stanford professors) own a $16.4 million vacation home in the Bahamas (suspicious if you ask me).
-FTX purchased at least $121m in luxury real estate for the use of executives and employees
-There have been a bunch of Phishing scams being sent out to victims of FTX promising to reclaim lost funds.
-Sequoia Capital wrote down its equity in FTX to $0 on 9 November, losing $214 million. Sequoia released a notice to investors, also published on Twitter, assuring them the firm's stake in FTX represented a small amount of its overall portfolio, and replaced a profile of Bankman-Fried published on the firm's website with a link to the same notice.
-Cryptocurrencies experienced swings and declines in value as news of FTX's collapse first emerged in early November: Bitcoin sank to its lowest price in two years and the share prices for publicly traded cryptocurrency companies declined. The price of Solana, which was affiliated with Bankman-Fried, declined as well.
-The crisis at FTX has inspired an increase in withdrawals from other exchanges. Bloomberg reported that the collapse of FTX exacerbated institutional scepticism of cryptocurrencies as an asset class.
-FTX’s ex-CEO Sam Bankman-Fried blamed his “irrational decisions” on “sh---y” circumstances in a letter obtained by CNBC that was sent to employees of the bankrupt crypto exchange.
My thoughts on the FTX Saga–
- Greed is the beginning of the end- A young intellectual building a great platform turned to CEO who siphoned consumer funds. Ultimately, he got greedy and did not know when to stop, Mr Bankman could’ve made money without taking things too far, yet the power trip got him into a lot of trouble. The crypto timeline on Twitter has been wild – memes and jokes flying out in the 1000’s and people saying they ‘called it’ or ‘knew he was evil’. In my opinion, nobody really knew about anything except those involved, and this is just another case of ‘why nations fail’ in human form.
- Crypto is not a get rich scheme- Warren Buffet is of the opinion that normal unsuspecting people put money into exchanges expecting it to triple. I agree.
The average person treats cryptocurrency like a lottery ticket – ‘People aren’t getting rich anymore- crypto is dead,’ ‘People are getting rich – let me buy into it.’ – this means that crypto replicates the laws of supply and demand and doesn’t always defy standard economic patterns or hedge against inflation.
This wasn’t the aim of crypto. If people were driven by value and utility and buyers were believers of digital currency not pseudo-gamblers, then the market won’t be as turbulent as is.
- If you have crypto, keep it in a wallet- Think of a crypto wallet like a digital safe that you have the encrypted keys to; liken it to a physical safe that can’t be accessed without the combination, and think about a crypto exchange like your debit card or bank account that can be stolen from or defrauded.
- Diversify your assets- banks and traditional investment platforms protect your money up to a certain amount, so are a safer bet for money one has hopes of retaining. Crypto exchanges have a lot of clauses in the fine print. If you want to keep some money on an exchange, ensure that you spread your crypto across multiple storage formats.
- At the End of the Day, nobody knows who and what is legitimate- Coinbase sent me an email, doing the PR to imply that they are not like FTX and that they are legitimate so will protect my money, but nobody truly knows, till push comes to shove.
There is so much more to be revealed, so stay tuned. If you have a Twitter account, please follow the story- the commentary is insane.
Quote of the week – ‘Greed makes a man blind and foolish, and makes him an easy prey for death’
Podcast Episode of the week- Not Overthinking: Catching Up on the FTX Crypto Drama. I love this podcast by youtuber Ali Abdal and his brother Taimur; the podcast touches on several topics such as books, mental-models, lifestyle-design, and things that are hard to examine but important to explore. I always learn something new when I listen to it. In this episode, the hosts do a deep dive into their thoughts on the FTX saga with their humorous insights and opinions.
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