Is FTX’s bankruptcy a black mark for the crypto industry?

The second largest crypto exchange in the world, FTX, has filed for bankruptcy. Hundreds of thousands of customers have lost their cash. Sam Bankman-Fried, the FTX founder, was deemed as the genius of the cryptocurrency world.

He was also a multi-billionaire. Not anymore. Considering that his wealth was tied to FTX’s native token FTT, which collapsed on bad news.

But on November 2, things changed dramatically.

The popular crypto magazine CoinDesk published revealing material stating that the only secure base for the FTX was FTT tokens, assets issued by FTX’s sister firm.

FTX’s sister company Alameda Research had $14.6 billion in assets as of June 30. And those assets were FTT. Simply put, the top management of the exchange attracted real money from the big players (including top funds), not having full-fledged collateral except for their own FTT tokens.

The bubble popped after CoinDesk reviewed the leaked balance sheet of Almeda Research, which showed an $8 billion debt owed to FTX and did not have enough liquid cash reserves.

This story instantly shook the entire industry. To calm investors, Binance CEO Changpeng Zhao, immediately announced that Binance decided to sell what was left of FTX Token as part of “post-exit risk management, learning from LUNA”. Binance had previously held approximately $529 million worth of FTT. The announcement brought the FTT down sharply. The token fell by 12% in 24 hours.

Of course, other clients did not stand aside. They started to sell FTT urgently and withdraw assets from FTX. That very quickly led to a liquidity crisis. The exchange failed to execute orders because of the massive withdrawals. In 72 hours, $6 billion flowed from FTX. On November 7, FTX informed customers that it had to block the withdrawn option.

Did Sam Bankman-Fried try to save the crypto exchange?

Apparently, he tried. FTX founder relied on Binance to rescue the struggling crypto exchange, but Binance refused to acquire FTX as it had previously planned. And it’s understandable since the acquisition was pointless. All the money would have gone on covering the clients’ orders whose money got stuck in FTX.

FTX didn’t manage to attract investors’ money and filed for bankruptcy on November 11. Funds like Sequoia Capital and SoftBank immediately took losses, having no other options. Private investors have also suffered much. Many used FTX not for trading but for storing their crypto assets.

After the message that FTX suspended client withdrawals, about $600 million disappeared from the exchange’s wallets. FTX reported a hack attack.

And sure enough, many crypto exchange’s customers had their funds missing from their wallets and couldn’t access their crypto accounts.

The scale of the problem

Bankman-Fried called for more regulation of cryptocurrencies. He proposed a blacklist creation for those using crypto for illegal activities.

Bankman-Fried was in the Bahamas at the FTX headquarters at the time of the collapse of his cryptocurrency offspring. US regulators are investigating the FTX crash. If it is clear that the company misused client money, then the investigation will have questions about the role of Bankman-Fried in the whole situation.

The company currently owes between $10 billion and $50 billion to more than a million creditors. At the same time, the FTX exchange had only $900 million in liquid assets (data from November 10).

Can you feel the scope of the “genius scheme”?

FTX filed for bankruptcy this month. Newly appointed FTX CEO John Ray III is trying to sort through the messy bankruptcy process.

Assessing the prospects, we can recall Mt.Gox (it went bankrupt in 2014). The exchange’s clients got a chance to claim their lost funds only after eight years!

What are the prospects of the crypto market after FTX’s collapse?

Of course, the cryptocurrency market initially came under significant pressure. But market participants got over the first shock, and volatility has somewhat subsided.

Nevertheless, there are no significant drivers that could push the cryptocurrency market up. Digital assets are not in the best shape since they are a part of the market related to the risky segment like stocks. At the same time, cryptocurrency is psychologically an even more risky asset. Therefore, investors are now reluctant to enter this market.

The centralized platforms face a lack of liquidity, low trading activity, falling demand, and decreasing prices.

Analysts are pulling up with disappointing forecasts, expecting Bitcoin to fall to as low as $13,000.

The collapse of FTX affected other cryptocurrency exchanges, which also faced a liquidity crisis due to a large number of withdrawal requests.

It suddenly became clear that crypto exchanges may have problems with market capitalization. It is highly likely that not only FTX thought of creating tokens out of thin air.

Could FTX drag other projects down with it?

The Wall Street Journal writes that the BlockFi exchange is collecting paperwork to file for bankruptcy. Salt, AAX, Liquid Global, and Gemini also had problems with withdrawals.

The collapse of FTX proved to be a stressor for bitcoin whales and long-term investors (holders), writes Glass node. The net outflow of bitcoins from cryptocurrency exchanges to non-custodial wallets reached a record 172,700 BTC per month. The trend driver is the loss of trust in centralized platforms.

Who is the winner?

Projects of cold/hardware wallets (client’s physical access to the wallet) are among the winners. So, the token of the decentralized wallet Trust Wallet pulled up by 84% in 7 days.

In any case, if you trade crypto, cold wallets are a must-have.

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