Sam Bankman-Fried, a crypto billionaire, and the business he built, FTX, catastrophically crumbled, costing him 94 percent of the total of his net worth as well as his position as CEO, and his crypto empire ended up declaring bankruptcy.
However, there is much more to the story, including implications for the whole cryptocurrency industry. What happened and its significance are explained here.
What is FTX and who is Sam Bankman-Fried?
The MIT-educated, Silicon Valley-born Bankman-Fried, commonly known as SBF, founded his cryptocurrency trading company, Alameda Analysis, in 2017, following stints in trading firm Jane Street and the nonprofit sector.
2 years later, Bankman-Fried & his team introduced FTX, a cryptocurrency exchange platform with benefits including affordable trading costs and sophisticated trading possibilities. According to Bloomberg, Bankman-Fried made a fortune from FTX and Alameda, which generated profits of $350 million & $1 billion, both in 2020.
Bankman-Fried had a net worth of $16 billion before this week, but his total wealth peaked at $26 billion. At the age of 30, he had already established himself as a significant political donor, recruited celebrities like Tom Brady and Gisele Bündchen that promote FTX, and acquired the naming rights to the Miami Heat’s home arena.
What occurred, then?
Early in November, the cryptocurrency magazine CoinDesk published a shocking article that cast doubt on the stability of Bankman-enterprise. Fried’s
Even though Alameda Research & FTX are independent businesses, the study discovered that majority of Alameda’s assets were linked to the FTT cryptocurrency that FTX created. Technically speaking, there is nothing wrong with it, but FTX’s liquidity was called into doubt, according to CoinDesk.
Only a few days later, matters worsened as Changpeng “CZ” Zhao, the CEO of Binance, the company that is undoubtedly FTX’s main rival, chose to liquidate FTT stock valued at over $530 million. Customers rushed to withdraw as well, and FTX struggled to process an estimated $6 billion in transactions over 72 hours.
When Bankman-Fried unexpectedly announced on Tuesday, November 8th, that Binance might purchase FTX and essentially save it, the value of FTT recovered after falling by 32%.
So why is FTX constantly having issues?
Binance stated on Wednesday that it was terminating the agreement, citing information obtained during the due diligence process, claims of improper handling of user assets, and the potential for a government inquiry.
The information caused FTT to drop even further; Bankman-Fried lost 94 per cent of his net worth in one day.
Bankman-Fried started contacting other business rivals in the sector, like Coinbase CEO Brian Armstrong, for the rescue but to no effect. Bankman-Fried left her position as CEO and FTX filed Chapter 11 bankruptcy on Friday.
How did it happen?
Bankman-Fried attributed FTX’s collapse to a combination of excessive client withdrawals and his inaccurate estimates of the amount of debt FTX had incurred in a series of tweets saying he “fucked up twice.”
However, a Reuters study made the case that there could be more forces at work. According to the news service’s anonymous sources, Bankman-Fried secretly shifted client assets from FTX to Alameda early this year after Alameda suffered a string of losses.
Insider’s request for a response from FTX was answered after a period of time.
Who else is affected by FTX’s failure?
Numerous well-known investors, like SoftBank Vision Fund, Tiger Global, as well as BlackRock, support FTX. This week, Sequoia announced that it is reducing its stake in FTX from $213.5 million to $0; the illustrious VC company had previously made $213.5 million in FTX.
Then there’s Bankman-inner Fried’s circle, a team of ten individuals who shared his home and operated FTX and Alameda from the Bahamas. According to CoinDesk, the group was made up of a mix of his college pals and previous coworkers and was deeply entwined with Bankman-enterprise. Fried’s So it’s likely that they are currently experiencing significant losses as well.
One employee told CoinDesk, “Some staff kept their entire savings on FTX.” We had faith that everything was in order.
What’s the overall meaning?
After experiencing a $2 trillion decline in May, the cryptocurrency market has had a challenging year.
The whole crypto industry is now being impacted by the FTX dispute. In one day, the value of the industry fell by 12%, according to CoinMarketCap, raising worries that cryptocurrency is about to get its own Lehman Brothers moment.
According to industry insiders, the drama may prompt regulators will try to rein in the cryptocurrency market or make major banks hesitant to allow consumers to trade cryptocurrencies. Additionally, analysts believe that the FTX crisis may spread panic among consumers, which would prompt them to remove their crypto assets. This is known as contagion.
In a report published on Wednesday, JPMorgan researchers stated that it seemed probable that there would be a crypto reckoning, and experts advised investors to be ready.
Bankrate.com analyst James told Insider on Friday, “As an investor, you should be considering what you’re investing in if it might disappear over a weekend.” “Prices are solely determined by public opinion and confidence in the potential of cryptocurrencies. If that conviction vanishes, you are left with nothing.”
Investigations started, improbable depositor bailout
Businesses that supported FTX are already jotting down their investments.
The demand for tougher regulation of the cryptocurrency business is growing among politicians and authorities.
The US Department of Justice and the SEC are investigating FTX to see whether any criminal behavior or securities crimes have taken place, according to an AP news agency’s report on Thursday.
The focus of the inquiry is the potential exploitation of client deposits by FTX to support wagers at Alameda Research.
According to specialized media outlet CoinDesk, there may be a conflict of interest because FTX’s digital currency, tokens of FTT, made up a 40percent of Alameda’s balance sheet.
Since neither Republican nor Democratic legislators have yet proposed a Lehman Brothers-style rescue for cryptocurrency depositors, there are currently no legal safeguards for cryptocurrencies in the United States.
The collapse of FTX, according to US Democratic Senator Elizabeth Warren, should serve as a wake-up call for Congress & regulators to hold the sector and its leaders accountable.
“The cryptocurrency sector contains far too many false promises. To better safeguard common people, stricter regulations and enforcement are required “She said.
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