Why Crypto Market Went Down? The FTX Drama Explained!
The crypto world has been in complete chaos following recent events of the FTX Exchange. The overall market for Bitcoin and Altcoins suffered massive price crashes of more than 20% on average, and Solana coin dropped its price by a whopping 45% in a single day due to FTX being a major investor.
The 2nd Largest Crypto Exchange in the USA, FTX faces a liquidity crunch that got fueled due to its dramatic actions, and its rivalry with Binance led to a dire state of the crypto market, making retail investors suffer for this mess.
But what led to such a dramatic market collapse? I share some of the insights and simplify the case of this recent black event that we are witnessing in the history of cryptocurrency.
The Story of FTX Exchange:
The story begins with Almeda Research firm, founded in 2017 by Sam Bankman Fried, which is a proprietary trading firm for cryptocurrency. Almeda firm made money by buying and selling cryptocurrency.
Later, to expand their business interest and ambitions, Sam Bankman Fried started FTX Exchange to help retail customers and Finance institutions provide liquidity in crypto trades. Their business model focussed on earning money through facilitating crypto transactions and charging minimal processing fees. Those who had big bets on crypto were provided loans with an average interest of 10%.
The Business model worked in their favor, making FTX one of the leading crypto exchanges across the USA. To boost its business, FTX launched its token named FTT, promising to offer premium features like low-interest lending margins and processing fees.
If a deep thought is given to FTT token, then its use case lied within the exchange ecosystem, lacking the intrinsic value like key Altcoins that provide broader services through their blockchains. Moreover, FTT was created and provided value from thin air that later became the reason for collapse of exchange.
Everything was working according to the business plan. From 2017 and as time progressed, the FTT token showed promising performance in delivering attractive benefits in its FTX exchange for users. Also, like other altcoins, FTT had a timely coin-burning mechanism that created deflationary supply, thus propelling its price upwards.
Throughout the timeline, more than 80% of shares of FTT tokens were held holistically by Almeda Research and Binance. Since Almeda owned FTT at a low price at its inception, the higher FTT price later strengthened its balance sheet.
On this basis of having more money, Almeda borrowed more loans providing FTT tokens as collateral, and this is where in a later stage things started to mess up for FTX and Almeda Exchange!
Here’s when the Drama Started:
The exact reason of collapse for FTX is complicated, but many investors in the crypto community believe a few key reasons for the collapse of FTX.
You see, FTX has provided loans to customers to trade cryptocurrencies. Similarly, Almeda has received loans from the FTX Exchange and other institutions where the FTT tokens were provided collateral by Almeda.
It is speculated that the real money lent by the FTX exchange is the customer deposits.
On the other side, in December 2019, FTX and Binance agreed on a strategic partnership to develop cryptocurrency wherein Binance received a $2 billion stake in FTT tokens for investing in FTX.
With regulatory pressure mounting on the crypto industry, it is believed that FTX parted ways from Binance, aiming to beat Binance in the crypto world.
In this eventual rivalry, FTX Exchange alleged ChangPeng Zhao (a.k.a CZ), CEO of Binance Exchange, and his company Binance in the market for gaining the Government regulatory advantage. On the other hand, FTX rejected the idea of Defi projects of the crypto world in the name of user verification, which got opposed by the entire crypto community.
And finally, when someone leaked the balance sheet of Almeda Research at the start of November 2022, the bubble popped for users across the globe. It showed an $8 billion debt owed to FTX and did not have enough liquid cash reserves. Also, allegations on Binance and CZ heated up the exchange rivalry.
Binance Exchange sold and liquidated its major stake in FTT tokens and to stabilize the crashing price of FTT, FTX sold a large worth of assets from its balance sheet that covered Solana, Ethereum, and its USDT reserves.
They reported — “As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.
There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)”
They’re saying — Alameda has to pay their lender $8 billion. But most of the assets are in FTT — whose value could tumble very quickly. And if its value did tumble, then Alameda would be in a lot of trouble, alongside FTX.
Witnessing the drama, investors requested to withdraw their funds. Since FTX didn’t have enough real money to repay, it collapsed under pressure.
The Lesson to Learn:
Protecting the customer's money should be the primary responsibility of any crypto exchange. It should not be misused and must be backed up with real assets when a sudden withdrawal occurs.
Since the balance sheet of Almeda contained more proportion of FTT tokens than real money and in the event of repayment of debt towards customer and exchange, it was unable to pay in one go marking an example of poor risk management.
As a crypto investor, any exchange must be backed by real money and proof of reserve, as stated by Binance which is currently working towards greater transparency in the crypto world.
Until then, invest safely and know the exchange you are considering or planning to invest your money in for crypto profits.
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