Why Did FTX Crypto Collapse?

By Boris Dzhingarov

FTX was one of the most reliable and profitable marketplaces during the crypto boom, featuring Larry David in its Super Bowl advertisement to encourage people to invest in cryptocurrency. Furthermore, its representatives traveled to Washington DC in order to lobby for greater regulatory clarity. And it collapsed. Why did FTX crypto collapse?

Now, it has fallen into disrepair and US prosecutors are conducting an investigation; its collapse may have far-reaching repercussions for the crypto sector moving forward.

FTX CEO Sam Bankman-Fried

The collapse of FTX, one of the world’s leading crypto exchanges in recent years, has left consumers and investors uncertain of their fate and has illustrated both risks inherent in financial transactions and human errors that exist throughout this industry. And it is not at all difficult to understand why did FTX crypto collapse. According to federal prosecutors, Bankman-Fried committed multiple instances of fraud while diverting billions from customers of FTX into Alameda Research; he was arrested in the Bahamas and extradited back to the United States where he appeared before a court hearing before being released with a record $250 million bond before facing numerous criminal charges against him.

Bankman-Fried’s legal woes have served to bring to light the need for greater transparency and accountability within the digital asset market. At congressional hearings on FTX’s collapse, employees handled invoices through instant messaging while using basic bookkeeping software designed for small businesses – though during its peak days, FTX was known for being a stable and reliable platform.

Alameda Research fell from grace in November 2022 when a news site dedicated to cryptocurrency reporting published leaked documents showing Alameda Research using its own FTX tokens (essentially company scrip) to make risky trades, disempowering consumer trust in these tokens and sparking an intense run on them; Alameda Research could not keep up with consumer withdrawal demands and saw its value decline significantly as demand outstripped supply.

Bankman-Fried was charged with securities and wire fraud for his role in the scandal, as well as illegally funneling money into political influence campaigns. Campaign finance records reveal that Bankman-Fried and other FTX executives donated over $70 million during the 2022 midterm elections; according to new filings by the government, he used his position as CEO to hide these contributions from view.

Once seen as the hero of the cryptocurrency industry, Bankman-Fried was disgraced by his role in FTX’s collapse and arrest. Since then, he has resigned from several companies and faces multiple fraud charges; unlikely to ever recover billions stolen from customers and investors.

FTX’s business model

FTX’s fall, once valued at over $32 billion, has sent shockwaves through the cryptocurrency industry and raised questions of regulatory oversight. Furthermore, its troubles have raised issues surrounding digital assets in general and what will become of them in the future. Changpeng Zhao from rival exchange Binance addressed this crisis on Monday by emphasizing better regulation within the crypto space.

CoinDesk leaked information that revealed that FTX had mismanaged customer funds, sparking an immediate run on deposits that caused it to lose $8 billion. As a result, Bankman-Fried was forced out as CEO and has had his fortune dissipated; moreover, he faces multiple lawsuits.

How FTX managed to raise so much money, only to lose it all so quickly is unknown; but there were undoubtedly serious flaws with their business model that investors should take note of when considering investing in companies with unusual business plans and high levels of risk.

Many are still struggling to understand what went wrong at FTX and some are calling for an immediate suspension on trading of its assets. Others contend that the company should be treated like any other financial institution with more stringent rules and regulations applied.

FTX denied any connection to Alameda Research or Terra protocol in an official statement issued Tuesday, though they acknowledged relying on some customer assets for funding purposes. As part of their withdrawal plan, they planned on selling assets to cover withdrawals while looking into financing to cover gaps between what was owed and what could be paid off.

Bankman-Fried was an unpopular figure among cryptocurrency enthusiasts, yet his fall from grace has served to emphasize the need for increased regulatory oversight of this industry. With all its shady deals and scammers operating within it, investors need protections consistent with other forms of finance. Even after their recent crash, cryptocurrency markets remain relatively stable while offering higher returns than traditional investments; their relatively volatile nature combined with being unbacked by any government makes cryptocurrencies attractive investments for diversifying portfolios.

FTX’s liquidity

FTX’s bankruptcy has sent shockwaves through the cryptocurrency industry, prompting other firms to stop withdrawing and take an introspective look at their own liquidity. It serves as a sobering reminder that this industry remains young with many challenges even for those with deep pockets.

FTX was composed of four “silos,” including a venture capital arm that invested in other companies; a hedge fund that traded crypto for profit; and two exchanges – one ringfenced and regulated in the US market, and another international. Unfortunately, its problems stemmed from both internal issues as well as leaks which led to its eventual demise; due to not enough cash available to cover customer withdrawals, investors rushed away, debts mounted up rapidly, and FTT value plummeted rapidly.

Federal prosecutors are conducting an investigation into the collapse of FTX, an exchange for digital token trading, alleging that its founder, Bankman-Fried misappropriated customer funds to cover debts at Alameda Research or make other investments; these allegations have been disputed and Bankman-Fried has since faced several criminal charges in relation to them.

In a statement issued today by FTX, they assured their assets are secure and that the company would be liquidated in an “orderly and fair fashion.” They also announced they have hired a restructuring specialist to assist their remains through bankruptcy proceedings; Bankman-Fried has also taken the step to step down as CEO.

Even with bankruptcy looming over FTX’s collapse, many investors remain optimistic about the cryptocurrency industry as a whole. Although its failure may not derail it, its fall does expose some risks inherent to any business and remind us to be extra vigilant with oversight when investing. FTX collapse has demonstrated this point very vividly – investors need stronger protections and oversight mechanisms in place in their accounts for greater protection of funds.

The collapse of FTX has sent shockwaves through the industry, prompting customers to demand their funds be returned from FTX. Venture capital firm Sequoia recently reduced its $210 million investment to zero while Ontario Teachers’ Pension Plan reports they may incur losses of around $95 million from their investment. Other firms have taken steps to safeguard themselves, such as setting withdrawal limits and permitting customers to transfer their funds onto different exchanges.

FTX’s security

Cryptocurrency has had an unsettling year and it is a part of why did FTX crypto collapse. After reaching astounding valuations and promising to transform banking, finance, and consumer payments, cryptocurrency has hit rough waters. Many firms have experienced hacking or fraud attacks leading to bankruptcy or loss of user funds – one such firm being FTX which was once valued at $40 billion and later went bankrupt due to hackers taking control of user funds.

FTX had four main silos: venture capital that invested in other companies; hedge fund that traded crypto for profit; two US exchanges allegedly regulated and restricted for US markets, plus another international one with looser regulation rules; major holders of its FTX token which it used for risky loans before its collapse was recorded by court documents as having over $8 billion in debts when it went under. According to court documents, its bankruptcy would become one of the biggest ever seen within this sector.

FTX’s collapse is yet another tragedy for the cryptocurrency industry and raises many pertinent questions regarding regulation. Furthermore, its demise highlights risks and human foibles within the financial services industry as a whole; its fall can be seen as evidence of hubris, greed, and fraud more so than crypto itself.

Security at FTX failed, prompting a federal investigation to take place. Prosecutors allege that Bankman-Fried misappropriated customer funds to cover debts at his other businesses or to invest in himself; as such he faces numerous charges, such as wire fraud and money laundering.

One reason FTX’s security failed was that they did not use strong encryption to safeguard sensitive information, such as wallet seeds and private keys. Instead, employees had access to unencrypted files which hackers used as entryways into user information and stole coins.

FTX’s collapse has set off a chain reaction, with multiple other exchanges and crypto lenders struggling to remain viable. Although this does not indicate a crisis within the crypto industry itself, it does demonstrate why more oversight should be placed over these new assets; not just protecting investor money but ensuring transparency within this new sector is paramount for success.