According to a new report published by blockchain analytics firm Nansen on Nov. 17, Failed cryptocurrency exchange FTX was allegedly intertwined with cryptocurrency trading firm Alameda Research from the start. Both entities were created by crypto entrepreneur Sam Bankman-Fried, who is now being considered for extradition by US authorities for his role in the exchange’s collapse.
Based on the evidence available on-chain, Nansen identified a number of wallets that place Alameda as one of the first liquidity providers for FTX in May 2019. Of the initial $350 million in the supply of its native FTT token, $27 million reportedly ended up in Alameda’s FTX deposit wallet, while the two firms controlled 86% of the combined supply. This setup meant that very little FTT was circulating on the open market, making the tokens extremely susceptible to price manipulation.
Flash forward to the 2021 bull market, when the FTT token rose from its initial price of $0.10 to $84; Nansen believed that the two companies could not cash in on their large positions without seriously spooking the markets, and probably used their FTT positions as collateral to borrow.
The blockchain analytics firm then noted that nearly $1.6 billion in FTT was exchanged between Alameda Research and broker Genesis Trading in September 2021. The problem, according to Nansen, began when FTX and Alameda began to reinvest the loans back into their own FTT tokens to drive up the price, which resulted in more increasing leverage.
The report went on to say that things seemed to be working fine until the cryptocurrency crash in June 2022. With the outbreak of centrally funded, or CeFi, companies like Three Arrows Capital and Celsius, which had exposure to Genesis Trading, Alameda likely faced a liquidity crisis that could not be resolved unless it sold its FTT tokens for cash. However, this was not possible without crashing its price and causing contagion on the FTX exchange.
On-chain data then showed that more than $4 billion of FTT tokens were sent from Alameda to FTX, illustrating the possibility of a loan issue for an equivalent amount. Some have raised the possibility of FTX moving client deposits as the basis for an emergency liquidity injection in Alameda.
In any case, the issue finally came to light when Changpeng Zhao, CEO of cryptocurrency exchange Binance, decided to liquidate his leftover FTX investments consisting of FTT. The move spooked investors and simultaneously sparked a bank run on the FTX exchange and intense selling pressure on FTT. Soon, users realized that the funds promised by FTX simply did not exist, leading to the beginning of the end for what used to be the third largest cryptocurrency exchange in the world.
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