The Fall of FTX, from the eyes of a non-crypto bro
Sam Bankman-Fried is having the worst November ever. (Photo: BBC News)
Full disclosure: I don’t know anything about cryptocurrency. All I know is that a lot of people are spending buttloads of cash in exchange for some digital token or a picture to keep as their own. And for some reason, these generate more money as time goes by. I stayed in my own lane as I largely ignored anything related to it—up until FTX, the second largest crypto exchange in the world, made headlines with one of the biggest downfalls in the industry.
"Trust me, It'll be fine"
Prominent words such as crypto, NFTs, Bitcoin, Ethereum, and others stood out to me because they actually sounded cool as they reminded me of early Xbox Live usernames. On a more serious note, stock trading was already such an overwhelming concept for me to grasp—enter these new digital economy wallets that claim to bring its users massive wealth potential (that’s not even all that guaranteed) and suddenly, I’m even more confused. Am I doing something wrong? Was I supposed to try and invest in these?
It already takes me two to three business days to properly discern whether or not I should spend for myself with something as minimal as food delivery or as essential as a new shirt. However, I’m aware that there are people out there who are genuinely invested in the cryptocurrency space. I personally know some of them myself.
When I found out about the massive fallout of FTX, I knew I just had to talk about it. While I may not have a personal stake in this narrative, it’s a classic cautionary tale of what happens when you fly too close to the sun. For this one in particular, it’s a lot of angry investors and a whole lot of debt to pay.
It's good business, friend
I wanted to find out how one of the most prominent players in crypto fell so far down and lost everything in a weekend. There's already been a lot of in-depth coverage on the matter. It’s a lot of tea—and it definitely sucks.
Let’s rewind a little bit and see where all this mess started. When Sam Bankman-Fried was working in the New York trading firm, Jane Street Capital, he discovered a way to make bank by purchasing Bitcoin cheaper in America and selling it with a higher price to Japan. At times, this would bring him over $25 million a day.
By 2017, Bankman-Fried had saved up enough money to start his own company, Alameda Research, a quantitative trading firm—most of which was composed of Bankman-Fried’s old MIT friends and workmates, who were all romantically involved with each other.
Alameda Research is one of the primary culprits of the biggest crypto disaster of the year. More on that later.
The exchange of an idea
Come 2019, Bankman-Fried started FTX, a cryptocurrency exchange. They basically provide a space for traders to store and exchange cryptocurrencies and tokens with each other. Think of it as one giant digital bazaar that’s filled with unreasonably rich individuals or those that are desperately trying to be.
Former FTX employees described management as “Kind of a little clique. Just a bunch of degenerate kids at the end of the day.” Now that’s what I expect a high school group to be, not the board of a massive company.
Despite problematic company leaders, FTX quickly rose to the top at an unimaginable scale. By July 2021, FTX was averaging $10 billion per day across one million users. Sports stadiums were named after the company, brand deals with the F1 Mercedes team and the NBA’s Golden State Warriors were signed, and advertisements starring household names such as Tom Brady, Larry David, and Steph Curry were made.
FTX was a big deal. If massive brands could trust them, then the general public could as well. When the likes of Tom Brady places his $650 million fortune on the platform, you’d be forgiven for thinking that this is far from a scam operation already.
Additionally, FTX was also building up its political connections in order to gain the proper leverage and government influence. Bankman-Fried donated $5 million to Joe Biden back in 2020 and about $69 million (nice) to politicians ahead of the 2022 elections. Ryan Salame, Co-CEO of FTX also donated $23 million to Republican politicians.
I mean come on, if someone donated to me even a fraction of that amount, I’d for sure think of them as a valued connection.
The fall of the idea
You thought I could get through this tea without saying the i-word huh? I do cover it a LOT here anyways so you’re probably used to it.
As inflation started to soar, the US Federal Reserve responded by increasing interest rates. The higher these interest rates are, the more expensive loans become. This leads to a more cautious economy.
Obviously, more expensive prices would cause people to worry more about essential stuff like food, housing, transportation, etc. Risk assets like cryptocurrencies are the least of their worries.
What comes next is a wild timeline of everything that can go wrong, will go wrong. I’ll just go ahead and say it: November is not a good month for FTX and Bankman-Fried.
On November 2, CoinDesk reported that a leaked document showed Alameda’s balance sheet that featured a whopping $14 billion in assets at the end of June—most of which were FTT tokens. This was concerning since Alameda and FTX were supposed to be separate business entities but the document stated otherwise.
By November 6, Binance, the world’s largest cryptocurrency exchange, announced that it would be selling off all of its FTT tokens “due to recent revelations” as said by their CEO, Changpeng Zhao in his Twitter.
November 9 came and Zhao revealed that FTX reached out to Binance for a possible acquisition. Talks were being made and it’ll be too complicated a process for any normal Twitter user to understand so he never really went into detail. He did however state that Binance has “the discretion to pull out from the deal at any time.” Surely, they won’t do that right?
They absolutely did. The next day, November 10, the official Binance Twitter account announced that they will no longer be acquiring FTX “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations.”
When reviewing FTX’s balance sheets, Binance discovered that it had a huge gap between assets and liabilities. More or less an $8 billion shortfall.
By November 11, Bankman-Fried resigned as CEO and both FTX and Alameda Research filed for bankruptcy. Crypto markets crashed with over $150 billion in market value lost in just three days.
What now?
As if things weren’t bad enough already, a hacker was able to siphon $600 million from FTX’s crypto wallets. However, there are rumors that suggest that it was an inside job within FTX in order to at least keep some of the money for themselves.
Earlier this year, FTX was valued at $30 billion. Now, Bankman-Fried has more debt across all of his companies and investments. It won’t be easy paying that given that his net value is negative.
When I first started digging into this story, I had the initial bias of not caring about the crypto space and thinking that it’s all just a big scam. Now that I’ve gone on and written this piece, I still have the same mindset.
What happened to all the missing funds? Will the government try to step in and issue more strict regulations for trading? What does this mean for the future of crypto currencies? There are so many questions for now. This is still a developing story and if anything else spicy comes up, I’ll be sure to talk more about it.
For now, only put in what you’re willing to lose. If not, good luck out there.
