By Landon Manning
In a bankruptcy that is compared to the sudden collapse of Lehman Brothers in the crash of 2008, FTX, one of the world’s largest cryptocurrency exchanges, plummeted dramatically, losing billions and declaring bankruptcy within days. .
The fall of FTX was sudden, monumental, and chaotic for the cryptocurrency world, in which bitcoin is inadvertently lumped together. Just a few months ago, FTX was heralded as a major player by the media as it bailed out other exchanges, did deals with the world’s biggest investment banks and even started talks. with world governments. So, for many investors and observers, it came as a terrible shock on November 8, when concern grew over a potential liquidity crunch. On November 11, then-CEO Sam Bankman-Fried resigned as the company declared bankruptcy. How could this happen? And what will this mean for the future of bitcoin?
Trouble began for FTX on November 2, when new Data came to light illustrating a troubling relationship between Bankman-Fried’s two main companies: the FTX exchange and the trading company Alameda Research. For Alameda, $14.6 billion claimed in various assets was found to be stored primarily in illiquid altcoins with over $5.8 billion split between FTT and “FTT collateral.” FTT is the token issued by FTX and used for transactions on the platform. On the FTX website, they claim that FTT is “the backbone of the growing FTX ecosystem”.
The company spent a third of all exchange fees to buy more currencies. This creates a problem: in fact, selling even $1 million worth of FTT would have a dramatic impact on its price, and FTT’s total market capitalization is less than the amount Alameda held on its books. In other words, the relationship between FTX and Alameda may have been rich in loans using these tokens as collateral. In the event of a real crisis as we saw last week, users were unable to withdraw money from the platforms.
This situation in itself was enough to make many FTX users very nervous. Exchange failures mean that clients who theoretically “owned” large amounts of assets on these platforms simply lose them in the event of insolvency. A good bank run destroyed trust in FTX as a platform and the devaluation of the FTT token also helped crash both companies. Changpeng Zhao (aka “CZ”), co-founder and CEO of Binance, publicly announced Binance’s plans to gradually liquidate all of its FTT holdings, leading to the realization of these exact events.
On November 8, the following bombshell went off: Binance sent a non-binding letter of intent to buy FTX to ensure solvency and liquidity, knowing that Binance could withdraw from this agreement at any time during the period. of discovery. Although the exact details of this discovery of documents are not yet known, CZ took to Twitter again to Publish two tips: “Never use a token you created as collateral” and “Don’t borrow if you run a crypto business. Don’t use capital ‘efficiently’. Have a large reserve.
Until the next “sadday it was confirmed that the deal was dead on arrival. With regulators growing increasingly wary and the market smelling blood in the water, FTX’s last hope of staying afloat has been dashed.
Within two days, FTX was complete. CZ compared this event to the financial crash of 2008 as “probably an exact analogy”. With the demolition of one of the largest exchanges in the blink of an eye, this could spell trouble for other exchanges and the entire industry. Bitcoin’s valuation has already plummeted by several thousand dollars, as a widespread fear of ending up with worthless tokens and altcoins sweeps users around the world. Yet despite comparisons to the 2008 crash who created bitcointhe biggest silver lining may be in the differences between Bitcoin and finance, especially when it comes to bailouts.
In the traditional stock market, cascading bank failures eventually led the US federal government to bail out private banks, which more or less landed on the backs of the US taxpayer. Bitcoin, however, is trustless, stateless, and decentralized. When a company is on the verge of bankruptcy and none of the other companies want to bail it out, no one else comes to the rescue of bad actors or companies with harmful business practices. Instead, the industry will take a big hit with leverage being knocked out of the system and better companies filling the void.
Bitcoin has survived a large number of crashes and bear markets. This is what has given the community such enduring resilience. No one will come to save bitcoin except the Bitcoiners themselves. Periodic events like this are necessary to remove some of the excess. Where will the market bottom and for how long? When the community rebuilds and reorients, how far will the next bull market go? It is impossible to answer such questions, but there are more than enough reasons to believe that Bitcoin and its rock-solid fundamentals can survive and thrive despite this setback.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.