In less than a week, a 30-year-old entrepreneur once hailed as the modern-day JP Morgan watched his digital empire, including billions of his own fortune, ebb in a death spiral that has shattered the very foundations of the trillion-dollar crypto industry .
On Thursday, Sam Bankman-Fried issued a mea culpa: “I f**ked up,” he wrote in one Long twitter threadand apologized to investors and customers of FTX, the exchange platform he founded in 2019.
Outages are not uncommon in the murky, largely unregulated world of crypto, but FTX is not your average crypto startup. Its near-collapse this week represents a potential turning point for an industry many critics say has gotten a pass for far too long.
So what happened to FTX and why is the entire crypto space freaking out about it? There are still many uncertainties, but here is what we know.
Last week, crypto news site CoinDesk published an article based on a leaked financial document from Bankman-Fried’s hedge fund Alameda Research.
The report indicated that Alameda’s business was on shaky financial footing. Namely, that the majority of its assets are held in FTT, a digital token minted by Alameda’s sister company FTX. That was a red flag for investors since the companies were separate, at least on paper. However, Alameda’s disproportionate ownership of the token suggested the two were much more closely related.
On Sunday, the CEO of Binance, FTX’s much larger rival, offered his opinion The company liquidated $580 million worth of FTX holdings. This set off a firestorm of drawdowns that FTX didn’t have the money to handle.
By Monday, concerns about Alameda and FTX had spilled over into the broader crypto market. but Bankman-Fried was defiant, tweeting that FTX and its assets are “fine”. He also feuded with Binance CEO Changpeng Zhao, whose tweet fueled the run on FTX deposits.
There was clearly bad blood between the two, which is why it shocked the industry when the couple announced a tentative deal on Tuesday for Binance to rescue FTX.
“This afternoon, FTX asked for our help,” Zhao tweeted Afternoon, noting that there was a “significant liquidity crisis” at the company and that Binance would need to conduct corporate due diligence before proceeding with any deal.
However, almost immediately after peeking under the hood, Binance began to pull back.
Meanwhile, Bankman-Fried’s personal fortune also plummeted. According to the Bloomberg Billionaire Index, Bankman-Fried’s net worth plummeted 94% in a single day, from more than $15 billion to just under $1 billion — the biggest one-day drop the index has ever recorded. (The estimate of his net worth was based on the assumption that Binance would eventually bail out FTX, where much of Bankman-Fried’s personal wealth is held. Which means his net worth may continue to decline.)
Cryptocurrencies tumbled further on Wednesday as investor concerns about the FTX bailout spread. Bitcoin and Ether, the two most popular tokens, both hit their lowest levels in two years.
The sell-off deepened after media reports emerged that Binance was tending to back out of the deal. In fact, Zhao tweeted a scathing assessment of FTX’s woes on Wednesday afternoon:
“Initially our hope was to assist FTX’s clients in providing liquidity, but the issues are beyond our control or ability to assist.”
He also alluded to allegations of “mishandled funds” and investigations by US regulators.
Binance was out. FTX’s best shot at a lifeline was gone.
The full extent of FTX’s financial woes is not yet known, but multiple reports state that the company is facing an $8 billion deficit. Without a quick equity injection, Bankman-Fried reportedly said Thursday the company faced bankruptcy.
Ever since the Binance deal fell through, Bankman-Fried has been scrambling to raise funds. On Thursday, he tweeted that there were “a number of players” the company was in talks with.
“We’re spending the week doing everything we can to increase liquidity,” he wrote in his apology thread. “Every penny” of it, plus the remaining collateral, is used to heal users, followed by investors and employees.”
Despite its reputation as a reliable, low-risk investment portal, FTX’s business appears to be built around a complex, extremely risky type of leveraged trading.
Clients have deposited their funds to engage in crypto trading. But it appears that FTX instead took billions of dollars of that money and loaned it to its sister company Alameda to fund these high-risk bets, according to The Wall Street Journal.
As Bloomberg columnist Matt Levine put it differently, “FTX took their customers’ money and traded it for a bunch of magic beans, and now the beans are worthless.”
At the end of the day, FTX experienced the crypto equivalent of a classic bank run. Customers wanted to spend their money and FTX didn’t have it.
With traditional financing, customers’ funds are protected by the Federal Deposit Insurance Corporation, which insures deposits. However, the FDIC does not insure stocks or cryptocurrencies, which calls into question the fate of FTX’s clients and investors.
One such investor was the Ontario Teachers’ Pension Plan, which said it had invested $95 million in both FTX International and its US company “to gain small-scale exposure to an emerging area of the financial technology sector.” In a statement Thursday, the plan noted that any loss on its investment would have “limited impact” as it represents less than 0.05% of its total net assets.
On Thursday, Bankman-Fried said Alameda Research would halt trading while FTX focuses on emergency fundraising.
But after Binance, the industry’s largest exchange, refused to bail out its rival, FTX may have few options.
Bankman-Fried told employees in a memo obtained by the New York Times that FTX had held discussions with crypto entrepreneur Justin Sun, who tweeted that he was working to “put together a solution” with FTX.
Meanwhile, US agencies including the US Department of Justice and the Securities and Exchange Commission are investigating FTX’s operations, according to Bloomberg.