FTX Crash

07.06.2023, 17:23
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The FTX exchange went bankrupt in a few days and dragged the market down. But this next "storm in the stock glass" will not create long-term negative consequences for bitcoin and the cryptocurrency industry as a whole.
FTX Crash
The main topic of the first half of November is the unexpected collapse of FTX, one of the largest cryptocurrency exchanges. Its owner, American Sam Bankman-Fried, a week ago was one of the first media personalities of the industry, a philanthropist and a venture investor with a capital of $ 16 billion. In one day on November 8, the multi-billionaire turned into a simple millionaire, and three days later he became bankrupt and a potential defendant in a bouquet of lawsuits.

Many attribute the leading role in initiating the collapse of FTX to the founder of Binance Changpeng Zhao, who could eliminate one of the main competitors or even act for personal reasons — for example, to avenge the collapse of Terra, because of which Binance suffered significant losses.

Zhao really "launched" the process, but he denies personal enmity with Bankman-Freedom and other underhand games. Whether this is the case, we are unlikely to find out, but Binance's participation in the course of events is significant and looks quite consistent.

 

How events unfolded

Back on November 6, the prospects for FTX in the public field looked cloudless. For example, the technical director of Circle said that FTX will be one of the key partners in the launch of the new EUROC stablecoin on the Solana blockchain. At the end of October, Bankman-Fried talked about plans to launch his stablecoin in partnership with one of the major players. At the same time, he estimated the volume of FTX's free assets in the range from $1 billion to $4 billion.

But on the evening of November 7, thunder struck from a clear sky. Changpeng Zhao said that his exchange decided to urgently sell all its reserves of FTT tokens (internal FTX token) due to "unexpected circumstances." In particular, Zhao said that the capitalization of Alameda Research, the venture and research "daughter" of FTX, amounting to $14.6 billion, is provided exclusively by FTT reserves, and at an inflated price.

Alameda agreed to buy the tokens for $22, which was 10% below the market price. The terms of the transaction were determined in several months due to insufficient FTT liquidity. However, Binance refused to buy out at such a price, insisting on the "book value".

Traders reacted quite nervously, and the first rumors about the possible insolvency of FTX began to spread. The FTT token fell to the estimated redemption price of $22, and then lower. Other cryptocurrencies have also started to decline. FTX clients rushed to withdraw assets from the exchange, but not all of them had time. A familiar picture, isn't it?

To replenish reserves, FTX began selling off reserves in other crypto assets. For example, the BIT token of the decentralized BitDAO project fell by more than 20% in a day. The founders of the project suspected Alameda Research of dumping tokens, which, according to the agreement, the company was supposed to keep until the fall of 2024. But even these sales were not enough, although "hundreds of millions of dollars" were withdrawn from FTX only in the first day.

FTX did not make any official statements, but on November 8, third-party analysts noticed that the exchange actually froze the withdrawal of cryptocurrencies. The last outgoing transaction on the Ethereum blockchain occurred at 14:37 Moscow time.

The reasons for the liquidity crisis on FTX may consist in a number of investment mistakes made by Alameda Research and large losses incurred by the company during the summer market decline. According to Reuters, to close the hole in Alameda's balance sheet, which reached $10 billion, FTX transferred about $4 billion to the accounts of this company, including from customer deposits.
To save the situation and avoid a public scandal, Bankman-Fried turned to his main rival for help. He offered Binance to buy all FTX assets outside the United States, valuing them at "several billion dollars."
Initially, a symbolic transaction price of $1 was assumed, while Binance assumed FTX debt obligations. Tokens of both exchanges briefly went up.

However, the parties did not agree. After analyzing the real financial condition of FTX, Zhao demanded the inclusion of assets in the transaction FTX.US . Bankman-Fried disagreed, after which Binance refused to make a dangerous purchase. The details of the failed transaction are not disclosed by the parties.

According to information from Bankman-Fried himself, the total volume of requests for withdrawal from FTX in all assets, including fiat currencies, from November 7 to November 10 amounted to $6 billion, including about 20,000 BTC. The exchange did not have such funds. Bankruptcy has become inevitable.

Sam Bankman-Freed's last desperate attempt to save the exchange was an appeal to investors, in which he requested $8 billion, promising to resolve the liquidity crisis and restore the position of the exchange. But there were no people willing to invest in such a risky business.

On Friday, November 11, FTX officially announced the filing for bankruptcy. Together with the parent company, Alameda Research and another 130 affiliated companies are joining the bankruptcy procedure. Sam Bankman-Fried resigned, and an interim manager was appointed in his place. The regulator of the Bahamas, where FTX is registered, froze the assets of the exchange, accusing it of misuse of funds, in particular transferring them to Alameda Research.
The liquidation Commission immediately stopped all operations on the exchange, began to evaluate assets and transfer them to cold wallets. At least, that's what FTX's legal adviser says. The exchange's clients still have a hope to get their money back at least partially and without delaying the process for 8 years, as happened with MtGox clients who are still waiting for their money, devoured by bureaucratic procedures and falling cryptocurrency rates.

Reaction of the cryptocurrency business to the fall of FTX

Most cryptocurrency companies quite predictably rushed to kick FTX's corpse and distance themselves from its problems, call for an investigation and write off losses.

Thus, the technical director of Tether and Bitfinex, Paolo Ardoino, said that his company does not have any investments in FTX and therefore will not suffer from its bankruptcy in any way. At the same time, Tether froze the USDT address with FTX-owned tokens in the amount of $46.3 million, explaining this with requests from regulators and law enforcement agencies.

The CEO of the largest American exchange Coinbase sympathized with FTX customers and noted that his exchange's customers would not be affected in any way. In addition, he stated that Coinbase has not issued and does not plan to issue its own token, as it is a risky tool used for speculation and attracting customers. Genesis Trading and Crypto.com .

The manufacturer of Ledger hardware wallets announced the failure of its Ledger Live web services due to the increased load from the huge number of requests for transactions with FTX-related crypto assets.

But not everyone managed to get off with words. The BlockFi credit service suspended the withdrawal of funds, citing FTX problems, although just a few days ago it declared complete non-involvement in this exchange. A large venture capital company Sequoia Capital is ready to write off $214 million invested in FTX, including $63.5 million from a subsidiary fund. Investment company Coinshares announced assets frozen on FTX worth about $30 million.

After the official announcement of bankruptcy, "suspicious" deposits in FTT tokens were blocked by three major exchanges at once: Binance, Huobi and Kraken. Probably, other sites will do the same, and these assets will be attached to the liquidation mass. The total amount of all remaining FTX assets has not yet been calculated.

And finally, the last nail in the coffin of the already dead stock exchange was hammered by the magnificent Elon Musk. He said that curly Sam seemed suspicious to him back in April, so Musk rejected Bankman-Fried's offer to participate in the purchase of Twitter.

FTX Bankruptcy on Bitcoin Exchange Chart

Cryptocurrencies have been trading sideways for almost five months, which is a very long time for such a volatile market. From June 19 to November 8, the price of bitcoin fluctuated in the range from $18,000 to $25,000, and in October even this modest scope shrank by half, its upper limit dropped to $21,000.

There are only two exits from the sidewall: up and down. There were no reasons for growth in an unstable political situation and the beginning of a global recession. The collapse of FTX served as a powerful kick, in two days it collapsed the rate of the main cryptocurrency from $ 21,000 to $15,500, that is, by 35%. The rest of the market more or less synchronously followed the flagship.
When the situation cleared up and the first panic subsided, the price of BTC rose slightly and is now stabilizing between $16,000 and $17,000. One of the fathers of the theory of technical analysis of markets, Tom DeMark, expected a further fall on Friday, November 11, but it stopped on Wednesday. Thus, the panic turned out to be weaker than expected.

While the market is assessing the consequences of the bankruptcy of FTX and its subsidiaries, and regulators are sharpening their teeth for the introduction of new restrictions with the noble goal of "protecting investors", strong movements should not be expected.

Separating the flies from the cutlets

Finally, it's time to talk about the main thing. Why are decentralized cryptocurrencies falling due to the ruin of a private company? Why did analysts of different calibres suddenly start talking about the loss of confidence in cryptocurrencies due to the fact that one bad manager failed to manage?

The reasons lie, first of all, in the generalization of views on very different classes of financial instruments. Seasoned experts on traditional markets do not understand the completely different nature of cryptocurrencies with their usual centralized assets: stocks, bonds and fiat currencies.
 

Read on the topic: Cryptocurrency Wallets: Ensuring Security and Convenience in the World of Decentralized Finance