If you have an internet connection you would have read about the extraordinary fall from grace of the world’s second biggest cryptocurrency exchange; FTX.
This unimaginable story — still unfolding — is by far the most monumental thing to happen to this space in its otherwise short, explosive lifespan.
No doubt the documentary Netflix is going to make about this saga of epic proportions will be the highest grossing of all time.
Twitter is already taking bets on who Netflix will cast and what the documentary will be called.
Let’s get into the specifics.
The Shorter Story:
On Nov. 2 — CoinDesk leaks controversial documents pertaining to Sam Bankman-Fried’s crypto exchange; FTX.
The report exposes some alarming information regarding the balance sheet of closely-tied sister company Alameda. It was found that the world’s second biggest crypto exchange may be at risk of insolvency.
Then a liquidity crunch of epic proportions bought FTX to its knees following tweets by competing exchange founder; CZ (aka the CEO of Binance).
These tweets exploited the aforementioned vulnerability found on Alameda’s balance sheet (more on that vulnerability later).
The ensuing bank run cripples SBF’s once great exchange which ironically then turns to Binance for a potential bailout.
That deal is pulled off the table after Binance does some due diligence and concludes the risk of acquisition to be too great.
Down-trodden investors at FTX are at present unsure whether they will ever be made whole. The only reprise? A somewhat empty apology from SBF himself.
Followed by some cryptic tweets that are yet to make sense…
To truly understand the series of events which led to FTX’s unravelling — read on.
The Longer Story:
CZ (Binance CEO) and SBF (FTX CEO) once friends — now competitors. Binance at the number #1 spot decides to sell its stake in FTX and agrees to take a large portion of the proceeds for the $2B deal in $FTT — a token created by FTX that the exchange uses for fees and as collateral against futures positions on the exchange (this part is important for later).
Then things take a turn. FTX comes under scrutiny when a report is released that found the balance sheet of Alameda Research (a crypto trading firm also controlled and owned by SBF) was full of FTX’s native $FTT. Not good.
This meant that Alameda rested on a foundation largely made up of a coin ($FTT) that a sister company (FTX) invented, not an independent asset like fiat currency or another crypto.
As FTX grew into the behemoth it is today so too did the price of its native $FTT token. This meant the value of Alameda’s assets also began expanding in tandem.
In other words; The Alameda balance sheet grew in size. It doesn’t take an accountant to know this about balance sheets — but the more assets you have, the more money you can borrow.
If you can borrow more money, you can deploy that capital and hope to make even bigger returns, especially if you are a trading firm like Alameda is (or rather was — just a few days ago Sam announced he was officially winding down the controversial trading firm).
So in short — Alameda bought $FTT tokens at low prices. Waited for their value to explode. And then began borrowing “real money” using these highly inflated $FTT tokens as collateral.
A big chunk of this borrowed money was from FTX itself. This is where things get murky. It is rumoured Alameda was in fact insolvent following the crash of Terra Luna — which wiped out some of the industry’s largest players. In other words — they needed money — and fast.
It is reported that FTX lent over half of its customer funds (a not-so-cool $10bn) to Alameda which then used said funds to meet debt obligations and make big bets on several projects.
But where do things go wrong? It starts with Alameda’s leaked balance sheet. This report exposed exactly how much $FTT Alameda had on hand. $3.66 billion. And liabilities? $7.4 billion. This meant Alameda’s collateral for said debt was largely in $FTT — an asset that could tumble in price at any point in time.
This report spelled rumours of FTX facing possible insolvency. At this point in time it seemed somewhat unlikely. After-all FTX was a crypto poster-child. A saviour of sorts. Bailing out other embattled projects.
SBF was quick to quell these rumours — assuring clients that FTX had sufficient reserves to honour all and any withdrawals. It would take a lot more to expose the malpractice taking place at FTX.
Enter Binance. Binance CEO, CZ, then takes to Twitter blaming SBF and FTX for lobbying against other industry players (like Binance).
Then the death blow. Remember Binance’s $FTT we mentioned earlier. Well - CZ, announces publicly on twitter to his 7M followers that he’s going to dump all of Binance’s $FTT on the open market. Now panic truly sets in. And a bank run on FTX ensues.
According to a message SBF sent to staff — FTX faced about $6 billion in withdrawals within 72 hours. There’s the crunch.
This all culminated in a 24-hour-long drama that ended with Binance signing an intent to acquire FTX. Binance subsequently pulled out of this deal. This left SBF scrambling to secure an investor to plug the gaping ($6bn) hole in FTX’s balance sheet. A last ditch attempt that never came to fruition. As of Friday the 11th of Nov. SBF officially announced that FTX and its subsidiaries were filing for chapter 11 bankruptcy.
The story continues to develop in real time. The fates of bankrupt FTX and its distressed customers remain obscure.
