The FTX Debacle
-by Atharva Yadav
In a startling turn of events, FTX, one of the most prominent cryptocurrency exchanges once valued at a staggering $32 billion, has found itself amidst a severe crisis. The chain of events leading to this debacle can be traced back to the origins of Alameda Research, the trading firm established by Sam Bankman-Fried in 2017, which initially focused on cryptocurrency trading. Alameda’s success prompted Bankman-Fried to extend his ambitions further, leading to the creation of FTX, a cryptocurrency exchange in 2019. However, it is FTX’s native cryptocurrency token, FTT, that stands at the epicentre of this near-catastrophic event.
When a new cryptocurrency token is introduced abruptly, its worth is often called into question. However, FTX took a different approach by granting FTT token holders exclusive benefits, including priority access to the trading platform, reduced fees, and cost-free withdrawals. This strategic move aimed at establishing a practical use case for the token and bolster its perceived value. The FTT token’s price began to climb steadily, further reinforcing its value through FTX’s practice of purchasing its own coin using a portion of generated revenue from transaction fees.
A crucial player in this narrative is Alameda Research, which Bankman-Fried has insisted is independent of FTX for several years, suggesting no questionable dealings. However, this claim has now been proven false. Alameda had discreetly accumulated a substantial number of FTT tokens, albeit at a relatively lower cost. As FTT’s value gradually soared, Alameda’s asset value swelled, expanding its balance sheet. This allowed Alameda to leverage their increased assets for borrowing, a common practice in prop trading businesses, thereby amplifying their potential profits.
Recent turmoil ensued when an anonymous leak exposed Alameda’s balance sheet to CoinDesk, a renowned crypto news media company. The leaked information revealed that Alameda possessed $14.6 billion in assets, with the most significant portion being $3.66 billion in “unlocked FTT” and a shocking $2.16 billion in “FTT collateral.” The liability side of the balance sheet showcased $292 million in “locked FTT” alongside $7.4 billion in loans. Alameda faced the daunting task of repaying the entirety of their $8 billion debt, with the majority of their assets held in FTT, whose value now hung in a precarious balance.
The revelation of Alameda’s debt obligations and FTT-heavy asset portfolio sent shockwaves through the market, triggering widespread panic. Investors and users grew increasingly aware of the inherent vulnerability in both Alameda’s and FTX’s financial standings, leading to a sudden surge in withdrawal requests. However, the final blow to FTX’s recovery efforts came from an unexpected source – a tweet from Changpeng Zhao, the founder of global cryptocurrency exchange Binance and a former associate of Sam Bankman-Fried.
Changpeng Zhao, commonly known as CZ, announced his decision to divest all FTT tokens he had acquired due to mounting concerns. In just 72 hours, a sum of $6 billion was drained from the market. Genuine FTT holders were sent into a state of alarm, as the massive influx of tokens flooded the market, causing the price of FTT to plummet precipitously. Consequently, Alameda’s balance sheet suffered immediate erosion as the value of its assets diminished rapidly. The contagion swiftly spread to FTX.
The collapse of FTX, one of the largest cryptocurrency exchanges, and the subsequent downfall of Alameda Research has sent shockwaves throughout the cryptocurrency industry. The intricate web of interconnectedness between FTX, Alameda, and the FTT token has unravelled, exposing vulnerabilities and dubious practices.
This catastrophic event serves as a wake-up call for the cryptocurrency industry. It underscores the need for greater due diligence, responsible practices, and regulatory frameworks that instil trust and protect investors. The aftermath of this catastrophic event will undoubtedly shape the future of the industry, prompting a collective reflection on building a resilient and sustainable crypto ecosystem. Only through transparency, accountability, and a commitment to ethical conduct, can we strive toward a more stable and trusted cryptocurrency landscape.
1. FTX Reaches $32B Valuation With $400M Fundraise. (2022, January 31)
2. FTX Token price today, FTT to USD live, market cap and chart | CoinMarketCap. (n.d.).
3. Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet. (2022, November 2).
4. Binance To Liquidate Its Entire FTT Tokens Following FTX’s Insolvency Rumors. (2022, November 7). Investopedia.