Cryptocurrencies have gained a lot of traction in the last few years for us to not notice them. With wild stories like the Luna crash or the Ethereum merge every now and then, it’s almost impossible to not keep your ears open about this industry.
As part of this equation, something wild again happened and this time, it caused a massive collision for the entire industry, affecting everything, from Bitcoin to the most recent token introduced.
The story
A couple of days back, the second largest crypto exchange in the world, FTX, which is valued at $32 billion ‘almost’ burnt down to the ground.
For now, the entire story and the reasons behind are uncertain, and this could very well change as well. But what matters the most is that what happened so far is very interesting.
Founder Sam Bankman of FTX began his crypto journey back in 2017 after learning that you can make good money from just buying and selling crypto assets and tokens.
Fast forward to 2019, he opened his own exchange called FTX where his goal was to make crypto trading open and convenient for everybody. Every time somebody made a transaction on the exchange, FTX made money.
For customers willing to go above and beyond to bet big, FTX even allowed customers to take out loans. Things were going great, so much so, that they came close to Binance on the list of the top crypto exchanges in the world, precisely in the second position.
But, something happened…
It all started with a report from CoinDesk on the FTX balance sheet. What that report contained is something we will talk about later in this newsletter, but the bottom line was the FTX started collapsing because of liquidity issues. But when you really think about it, these liquidity issues are just a way of saying that FTX customers can’t withdraw their money.
FTX, being a middleman in this situation connects people to the digital tokens. The money they hold from the people needs to be readily available for them to withdraw, right?
No!
Looks like FTX didn’t really do that.
The mistake(s)
See the thing is that FTX wants to make money. They do so by charging on transactions, generating interest on incomes, and right now, setting up their own crypto token – FTT.
The FTT coin, being a new project had good growth in the first few quarters. But there was something at play here. FTX, the trading company was buying its own token using its revenue to pump the prices. The money to do that was supposedly coming from the transaction fees, at least that’s what they claimed.
But was that really the case?
Sam Bankman, the founder of FTX always had enough FTT tokens under Alameda. How much? We don’t know, but it was enough to change the trajectory of the markets.
They acquired the token at a low price, and when the markets inched upward, their balance sheets grew in size.
To keep the lights on and continue growing their balance sheets, a lot of money was borrowed from the outside. However, when customers wanted to withdraw, well, there wasn’t enough for the FTX exchange to support all requests.
But why wasn’t FTX ready with money that they might have to pay back to their customers at any time?
Well the money was aside, a few billion dollars were. But what do you do when a big chunk of your customer base asks for their money back? You just don’t have enough!
And how this happened is rather interesting as well. This entire story about Alameda holding such massive amounts of the FTX coin wasn’t known to anybody until 6 days ago when somebody leaked the information to Coindesk.
As of June 30, the company had assets that amounted to $14.6 billion.
The single biggest asset – $3.66 billion unlocked FTT.
The third-biggest asset – $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.)
Alameda has to pay their lender $8 billion. But most of the assets are in FTT and their value could go away in no time, something that we’re witnessing now.
And people pulled back.
But that’s not all!
The final setback
The biggest competitor of FTX is Binance, a huge financial giant that won’t leave any stone unturned to gobble up its competition.
What’s interesting is that the owner of Binance and FTX were friends before. With time, they had fallen apart and Sam bought out his stake in Binance. Why? Nobody knows!
The buyout made Binance a whopping $2.1 billion and FTX suddenly had no competitor. However, this deal didn’t happen in cash. The owner of Binance had taken over some of the FTT tokens.
AND HE HELD ON…
In the meantime, Sam started colliding with the likes of Binance and started a public rivalry with Binance and Changpeng Zhao, its owner.
And guess what? As soon as the news report about the current state of FTX came out, Changpeng Zhao pounced on the opportunity. He decided to sell his FTT tokens.
This automatically meant that the investors that were holding on to the FTT tokens also got spooked and decided to dump it. This collapsed the entire FTT token.
With this move, $6 billion worth of assets were withdrawn from FTX in less than 72 hours, and the company was ablaze.
The last nail in the coffin was Changpeng Zhao also offered to buy FTX. And as of today morning, the news broke out that Binance walks away from FTX deal.
Binance claimed that the internal affairs of FTX were worse than they thought. Well, we’re going to let you read the rest of it…
Overall, this was such a story that took so many turns in such a short amount of time. So many events that you just can’t help but think about how things can change so soon and how due diligence could make your company go a long way.
Till next time…
