The digital currency trading company FTX, filed for bankruptcy this Friday under United States law. The co-founder and CEO of the company, Sam Bankman Friedapologized for the millions of losses of his clients and resigned from the position.
The short version of the story is that crypto tycoon Sam Bankman-Fried lost 94% of his net worth and his crypto empire collapsed. But the longer story of this crypto entrepreneur’s downfall could ripple through the entire digital asset industry.
Let’s go by parts.
Who is Sam Bankman-Fried and what was FTX?
Sam Bankman-Fried is a Silicon Valley entrepreneur who launched his crypto trading company Alameda Research in 2017. Two years later he created the FTX cryptocurrency exchange, which promised low trading fees and advanced options for traders.
Bankman-Fried became absurdly rich from his ventures, earning $350 million and $1 billion, respectively, in 2020 alone.
In his prime, Bankman-Fried had a personal fortune of $26 billion. He even at 30 years old he bought the naming rights of the stadium where the Miami Heat of the NBA plays.
What happened to FTX?
In early November, CoinDesk published an analysis questioning how stable Bankman-Fried’s cryptocurrency trading company really was. The report found that although Alameda Research and FTX are two separate companies, Alameda’s assets were mostly linked to FTT, a currency that FTX had invented.
There is nothing wrong with this in principle, but it raised serious questions about FTX’s liquidity.
Things started to get seriously complicated for FTX and Bankman-Fried when Changpeng “CZ” Zhao, the CEO of Binance, FTX’s main rival, decided to liquidate FTT for an approximate value of 530 million dollars.
Customers freaked out and in less than 72 hours they withdrew $6 billion, something FTX struggled to do.
Liquidity problems prompted FTX to enter into a non-binding agreement with rival Binance to sell its non-US affiliate FTX.com in hopes of resolving the crisis. However, due to various FTX breaches revealed in recent days, Binance dropped out of the deal.
Because of this, the company went from a valuation of around $32 billion to bankruptcy in a matter of days, and Bankman-Fried lost 94% of its wealth in a single day.
How did this happen?
A Reuters report suggested, citing unnamed sources, that earlier this year, Bankman-Fried transferred client funds from FTX to Alameda without telling anyone, after Alameda suffered a series of losses.
In a series of tweets, Bankman-Fried attributed FTX’s implosion to a combination of customer withdrawals and his own incorrect estimates of how much debt FTX had taken on.
Bankman-Fried’s inner circle, a group of 10 people who lived with him and ran FTX and Alameda in the Bahamas. CoinDesk reports that the group was a mix of college friends and former colleagues of his.
Various investigations in the United States
Separately, the California Department of Financial Protection and Innovation on Thursday launched an investigation into FTX Group, which includes around 130 affiliates, including FTX Trading, FTX US, and Alameda Research.
“We encourage the public to be aware of the risks of investing in volatile crypto assets. Users and investors should be aware that crypto assets are high-risk investments and should not expect their losses to be compensated,” the agency warned.
In addition, the United States Securities and Exchange Commission (SEC) and the Department of Justice have launched another investigation into the alleged fraud and other criminal offenses of FTX. While the authorities of the Bahamas, where the cryptocurrency company is based, have decided to freeze the assets of some of its subsidiaries.
Bitcoin price plummets
Bitcoin price crashed from $17,190 to $16,580 after FTX filed for bankruptcy on Friday, according to CoinMarketCap.
That same day the Mercedes-AMG Formula 1 team announced its decision to suspend its affiliation agreement with the company. Thus, the FTX logo will no longer appear on Mercedes cars.
Binance founder Changpeng Zhao commented that the FTX bankruptcy was “devastating” for the industry, because it affects user confidence in cryptocurrencies. In addition, he believes that from now on the crypto market will face greater scrutiny from state regulators.
Editorial Team The editorial team of EMPRENDEDOR.com, which for more than 27 years has worked to promote entrepreneurship.