The Fall of FTX: How the Crypto Exchange Crumbled

Once one of the largest and most trusted cryptocurrency exchanges in the industry, FTX went from being worth billions to almost $0 over the course of one year due to poor business decisions and its eventual collapse. The sudden fall of FTX leaves many investors asking how it could have gone so wrong, how their money disappeared so quickly and what they can do to prevent similar disasters from happening to them. Read on to find out more about the decline of FTX as well as some essential tips on how you can protect your investments in the future.

Why it collapsed
In the short term, because of a token called FTT. This was effectively a share in FTX, that the company issued itself and promised to buy back using a portion of its profits. As leaked documents to a significant publication showed, Alameda, a company used by FTX as a hedge fund, FTT, may have been trading using company scrip and using these shares to take out high-risk loans. This information spurred rival exchange Binance to announce its plans to sell its FTT holdings, spurring an all-out bank run and plunging the entire FTX exchange into chaos.

In the medium term, it collapsed because of some major problems that deal with the relationship between the FTX exchange and Alameda. The exchange can’t handle wire transfers so customers will wire their money to Alameda and FTX will credit their accounts. The money itself was never traded: Three years after this took place, Alameda had on hand, exchanged with, and lost $8 billion of customer funds. During the run, when FTX was exchanging fiat, they couldn’t find the fiat they thought they had, because they had never actually obtained it in the first place.

In the long term, FTX failed because the company was a mess. “Never in my career have I seen such a complete failure of corporate controls and a complete absence of trustworthy financial information as occurred here,” said Ray, the bankruptcy specialist. FTX should be closed down.

Binance – a rival exchange – made matters worse by announcing it was offloading all its FTT shares, sparking an even bigger rush for the exits by panicking customers who were holding onto FTT thinking they were valuable assets. By 12pm ET on Friday, only six hours after Binance’s announcement at 8am ET Thursday morning, FTX had withdrawn more than 90% of the cash from its cryptocurrency wallet.

According to Reuters, between $1 billion and $2 billion has disappeared from Sam Bankman-Fried’s FTX, which is entering bankruptcy protection. Bankman-Fried, now the ex-CEO of FTX, transferred $10 billion from his crypto exchange to Alameda Research, a digital asset trading house.

In addition to FTX, Alameda was also founded by Bankman-Fried. Numerous regulators are currently investigating the cosy ties between FTX and its customers, including the Department of Justice and the Securities and Exchange Commission.