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The Rise and Fall of FTX Cryptocurrency Exchange
FTX was a leading cryptocurrency exchange founded in 2019 by Sam Bankman-Fried and Gary Wang that grew rapidly to become the third largest exchange globally with over one million users by 2021 (Smith, 2023). However, FTX’s meteoric rise was short-lived, as the exchange collapsed in spectacular fashion in November 2022 amid revelations of mismanagement of customer funds and questionable financial practices (Davis, 2023). This paper will examine FTX’s origins, its growth into a major player in the crypto industry, the factors that led to its downfall, and the ongoing fallout from its bankruptcy.
Origins and Growth of FTX
FTX was launched in 2019 and was headquartered in the Bahamas, establishing its global headquarters there in 2021 (Smith, 2023). The exchange quickly gained prominence through innovative product offerings like futures and options trading and attracted major investments, raising over $900 million from prominent venture capital firms and earning a $32 billion valuation by early 2022 (Davis, 2023). Its charismatic founder, Sam Bankman-Fried, also known as SBF, became a leading voice and philanthropist in the cryptocurrency industry who advocated for increased regulation (Hetler, 2023).
By 2021, FTX had grown into the world’s third largest cryptocurrency exchange by volume, serving over one million users globally, and it continued its rapid expansion through acquisitions and partnerships (Smith, 2023). Its native token, FTT, was among the top ten cryptocurrencies by market capitalization (Davis, 2023). FTX also ventured beyond crypto through high-profile sponsorship deals, including purchasing the naming rights to the Miami Heat’s home arena for $135 million (Hetler, 2023). Its success burnished SBF’s reputation as a visionary in the industry and fueled expectations that FTX would launch an initial public offering in 2023.
Cracks Begin to Emerge
In September 2022, CoinDesk published an article raising questions about the financial relationship between FTX and Alameda Research, a trading firm also founded by SBF (Smith, 2023). It was revealed that Alameda Research’s balance sheet consisted primarily of FTT tokens and that it had borrowed significant amounts from FTX (Davis, 2023). This sparked concerns about a potential conflict of interest and whether FTX was sufficiently regulated given its ties to Alameda Research (Hetler, 2023).
The liquidity crunch at FTX accelerated rapidly in early November following further reports that as much as $10 billion of customer funds had been transferred to Alameda Research and reports questioning Alameda’s financial health (Smith, 2023). Withdrawals surged as customers lost confidence in the exchange, and FTX acknowledged a “liquidity crunch” on November 6th (Davis, 2023). The situation became dire as FTX confirmed an estimated $1 billion shortfall between assets and liabilities, raising the prospect of a bank run (Hetler, 2023).
Bankruptcy and Investigations
On November 11th, FTX filed for Chapter 11 bankruptcy protection in the United States, with SBF resigning as CEO (Smith, 2023). The bankruptcy filing revealed that FTX had more than 100,000 creditors, assets between $10 billion to $50 billion, and liabilities of $10 billion to $50 billion (Davis, 2023). Bankman-Fried also resigned from his role as CEO of Alameda Research. The collapse sent shockwaves through the crypto industry and wiped billions off the market capitalization of digital assets (Hetler, 2023).
In the aftermath, investigations have been launched both in the U.S. and the Bahamas into potential fraud and mismanagement at FTX (Smith, 2023). Regulators are examining whether customer funds were improperly used and whether FTX’s financial reports obscured its true financial position and ties between the exchange and Alameda Research (Davis, 2023). There are also accusations that FTX lent customer funds to Alameda Research, which engaged in risky trading strategies that may have contributed to FTX’s downfall (Hetler, 2023). Many have been left wondering how such a prominent company could fail so catastrophically in just over a week.
Works Cited
Smith, Timothy. “FTX: An Overview of the Exchange and Its Collapse.” Cryptocurrency: Strategy & Education, Investopia.com, 2023.
Davis, Darreonna. “What Happened To FTX? The Crypto Exchange Fund’s Collapse Explained.” Forbes: Business, Forbes.com, 2023.
Hetler, Amanda. “FTX Scam Explained: Everything You Need to Know.” Security, edited by Susan Fogarty, Techtarget.com, 2023.
Berg, Marlie. “The Collapse of FTX: A Timeline of the Cryptocurrency Exchange’s Drama-filled Demise.” Business, Fast Company, 2023. https://www.fastcompany.com/90804930/the-collapse-of-ftx-a-timeline-of-the-cryptocurrency-exchanges-drama-filled-demise. Accessed 15 Nov. 2023.
Kharif, Olga and Alpert, Liz. “FTX’s Collapse Opens Door for Crypto Regulation Overhaul.” Markets, Bloomberg, 2023. https://www.bloomberg.com/news/articles/2022-11-15/ftx-s-collapse-opens-door-for-crypto-regulation-overhaul-in-us-eu. Accessed 15 Nov. 2023.
