Inside FTX’s Collapse
How FTX collapsed and devastated the crypto industry
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As the FTX/Alameda empire crumbles, the crypto industry is witnessing its third or fourth $10B+ collapse this year. As was the case with Terra, Celsius and Three Arrows, the FTX debacle has deep ramifications for the space.
This week in the newsletter, we dive into what appears to have happened behind the scenes in FTX, the immediate impact of their downfall and potential contagion stemming from it.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Blockchain fees for both Bitcoin and Ethereum spiked to their highest in months as volatility led to an increase in activity
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation. This can be the case under regular circumstances, but what we saw this week was anything but regular.
- Ether withdrawals reached their highest in six months this week, with $600M leaving FTX between Sunday and Monday, with users rushing to withdraw as insolvency rumors picked up
- Unfortunately Bitcoin netflows data for FTX was not available to IntoTheBlock at the time of writing, but the aggregate of other exchanges point to still-significant $100M+ of net outflows
Inside FTX’s Collapse
The story behind FTX’s demise begins with Alameda Research, Sam Bankman-Fried’s trading firm. While it was claimed for years that Alameda and FTX were two separate entities altogether, recent events have shown this was not the case.
Even though specifics are still unclear, it is being widely reported that Alameda realized multi-billion dollar losses in May-June, following the collapse of Terra and broader crypto crash. Then, “Seeking to prop up Alameda… Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood… A portion of these FTX funds were customer deposits, two of the people said, though Reuters could not determine their value”, claims Reuters, citing anonymous FTX employees.
In short, FTX bailed out Alameda, using a combination of FTT tokens and user deposits to do so.
$4B Bail Out — There is evidence on-chain that Alameda received upwards of $4B worth FTT
- An address labelled under Alameda vested 170M worth of FTT and immediately sent it to FTX on September 28
- This transaction is believed to be Alameda repaying FTX for (at least part) of the bail out it received months earlier
- In order prevent doubts on that day, SBF had tweeted that they were just “rotating a few FTX wallets; we do this periodically”
Leaked Balance Sheet — On November 2, CoinDesk released a leaked snapshot of part of Alameda’s balance sheet as of June 30
- The company registered $14.6B of assets, mostly in FTT and SOL, against $8B in liabilities
- It was revealed that Alameda had $2.16B of FTT collateral
- This seems to suggest Alameda took a loan on top of the capital FTX had used to bail it out
CZ Announces FTT Sale — On November 6, the Binance CEO announced it would be liquidating their FTT position worth $2B
- CZ claimed they would attempt “to do so in a way that minimizes market impact”, even though he broke the news on a Sunday, typically crypto’s least liquid day
- Then Alameda’s CEO, Caroline Ellison, tweeted at CZ that they would happily buy Binance’s FTT holdings at a price of $22
- The specific $22 price tag then became a source of suspicion among the crypto community, as that had been FTT’s bottom price and appeared to be “defended” by the market
This kickstarted rumors of an Alameda and FTX insolvency, leading to billions in withdrawals from the exchange.
$3B Outflows — Between USDC, USDT and ETH, FTX recorded over $3B in outflows in aggregate between Sunday and Monday
- Then on Tuesday, users started reporting withdrawals had stopped functioning, particularly for larger amounts
- ETH withdrawals from FTX dropped 99.99% from $689M on Monday to $16k on Wednesday
- After halting withdrawals, rumors of insolvency and fractionally backing user funds intensified
This led to a precipitous crash in FTT’s price, which temporarily reversed after the notice that the exchange could be acquired by Binance, but continued shortly thereafter.
85% Crash — FTT token plummeted to the lowest levels it had been since March 2020
- 92% of holders are now estimated to be at a loss on their FTT
- Only 121 addresses (0.55% of holders) are profiting on paper from their positions
- Perhaps more strikingly, FTX employees bought equity in the company at a 50% discount of the company’s last $32B Series C valuation
- Renown VC Sequoia has marked down their $150M investment to zero
FTX seeked for an estimated $9.4 billion in rescue funds, with SBF stating the main priority was to compensate for users lost holdings. With FTX users, employees and investors hit by the news, sentiment in crypto reached its lowest since the week of Three Arrows’ and Celsius’ collapse.
Contagion Beginning — The sinking Alameda and FTX ships have begun to cause ripple effects across crypto
- Bitcoin set a new yearly low of $15,500, making a 77% drop from its top a year ago
- Alameda’s second largest holding, SOL, dropped as much as 50% just on Wednesday
- BlockFi, which had been in talks of getting acquired by FTX in the summer, announced that they would not be able to operate business as usual, pausing withdrawals from the platform
As SBF and FTX fall from grace into oblivion, we may have witnessed one of crypto’s darkest weeks. The extent of the contagion is still being figured out as more specifics come to light.
