Cryptocurrency traders were rocked during the past two weeks with rumours of a couple blurring the boundaries between user deposits and their investments. This culminated in a devastating crash that shook the entire industry and has been dubbed one of the darkest days in cryptocurrency history.
But what actually caused theFTX collapse? Bitcoin’s falling value was a factor, but what else?
The last quarter of 2021 saw a sharp decline in Bitcoin and other crypto markets, with prices now 75% lower than their all-time record. The entire crypto market cap peaked at $3 trillion, but has since dropped to a staggering $2.2 trillion.
Investors have certainly had a challenging year, with massive fiscal stimulus from governments during the Covid-19 lockdowns leading to high inflation across all countries. Central banks have responded by increasing interest rates, which has had a negative effect on investment markets such as stocks and cryptocurrencies.
Cryptocurrency values have been in a downward trajectory since the start of this year. This has made the industry vulnerable. The Terra Luna incident in May was a tipping point, as the markets dropped by almost $60 billion in a matter of days. Affected companies included Celsius, Voyager, Arrows Capital, and many others, all of which filed for bankruptcy.
The crypto markets seemed to be recovering in October, but then quickly collapsed again. CoinDesk revealed that the giants behind the collapse were FTX and Alameda Research, who had blurred the lines between their businesses. Binance responded by purchasing FTX and its obligations, but only after a day of due diligence declared the issue to be beyond their control.
A Little Bit of History: Explaining the FTX Implosion
Sam Bankman-Fried, commonly known as SBF, is a crypto tycoon who founded FTX, a leading exchange and quant trading company. CoinDesk found that while FTX and Alameda Research were two separate companies, the balances between them had become intertwined, with FTX token (indicated by ticker symbol FTT) dominating Alameda Research’s holdings.
Following this revelation, rival investor Binance announced that it would be selling all remaining FTT holdings for $580 million. This news caused the FTT token to drop in price, creating a panic among FTX users and a “run on the bank” as they rushed to withdraw funds. FTX had over $10 billion in user funds, and in the end only $4.5 billion in crypto assets were removed from the platform.
Chinese crypto magnate Justin Sun then offered a solution by allowing FTX users to back their deposits with TRON tokens. This was met with enthusiasm, causing the price of the tokens to surge by almost 50%. However, when folding occurs, users can expect to lose up to 99% of their funds right away.
FTX has since filed for bankruptcy in Australia and the United States, with a hacker allegedly stealing almost $1 billion of user funds from Canada. The Bahamian Government is currently investigating FTX for criminal conduct.
Impacts of the FTX Collapse
The fallout from SBF’s collapse has been far-reaching, with many other companies linked to FTX and Alameda Research in some way. Other businesses have had to step in to prevent users from withdrawing their funds while they assess the extent of their exposure.
The panic and hysteria caused by this incident has also been palpable, with many crypto investors abandoning exchanges and centralized platforms, withdrawing as much money as they can. Over $3.7 billion in Bitcoin has been extracted from exchanges, showing the extent of this trust issue.
It is likely that some users may be so disenchanted with the crypto markets that they will decide to sell their assets or leave the space altogether. The price drops in many crypto assets could indicate that this is already happening.
The FTX collapse has highlighted the need for better regulation of centralized cryptocurrency exchanges in order to ensure proper funds management. It has also reminded crypto investors that keeping their assets in their wallets is the safest storage method, protecting them from any exchange-related trauma.
This article does not endorse any specific cryptocurrency, broker or exchange.
