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The biggest crypto crash of 2022: FTX crypto crash explained.

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The biggest crypto crash of 2022_ FTX crypto crash explained
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FTX Exchange is a leading cryptocurrency exchange specializing in derivatives and leveraged products.

FTX was founded in 2018 by MIT graduate and former Jane Street Capital international exchange-traded funds trader Sam Bankman-Fried. The company offers a range of trading products, including derivatives, options, volatility products—and leveraged tokens.

The platform also hosts over 300 spot markets in cryptocurrency trading pairs such as BTC/USDT, ETH/USDT, and XRP/USDT. Its native token FTT is paired with USDT for trades on the platform.

The Story Behind Founding FTX.

Alameda Research was founded in 2017 by Sam Bankman-Fried. Alameda began as a proprietary trading firm dabbling in cryptocurrencies but quickly expanded its business model to tap into more traditional investment opportunities.

They made money by buying and selling cryptocurrencies, and they made lots of it. Soon Sam decided he wanted to do more than just trade crypto—he also wanted to help others learn how trading works.

So he and his friend (in 2018-19) built an exchange called FTX.

Exchanges provide a platform where users can trade cryptocurrencies. If you want to sell something, they’ll find a buyer. If you’re looking for something to buy, they’ll find the seller.

And every time FTX processed a transaction, it made money. It also gave customers loans if they were willing to bet big—but of course, the exchange imposed interest on this. For the most part, though, this was a neat little business model:

In 2020, SBF got rich off FTX and Alameda—the two companies netting $350 million and $1 billion in profit, respectively.

Bankman-Fried’s net worth dropped to $16 billion this week, though it was once as high as $26 billion.

But, What’s the problem?

The media coverage will tell you that FTX nearly collapsed because of a “liquidity” issue.

In other words— “When FTX couldn’t give customers their money back, people who had planned to buy and sell crypto on the exchange broke into a rage.”

But if an exchange is only an intermediary—a middleman that doesn’t take customer funds and use them as their own, but merely passes them along to others—it should technically never have a problem returning the funds.

All we can say for sure is that something went wrong here. What exactly happened, nobody knows. But there are some theories about what might have caused it

When Things got Started?

The moment FTX set up its exchange, it also introduced a cryptocurrency token—FTT. And it seems like this coin is at the heart of their near collapse.

In early November, cryptocurrency news site CoinDesk published a report questioning the stability of Bankman-Fried’s empire.

The report found that even though Alameda Research and FTX are separate companies, the assets of Alameda were mostly tied up in FTT, a coin developed by FTX. Though there’s no regulatory issue with it—FTT is not an officially recognized tender like dollars or euros—the report raised concerns about whether investors would be able to cash out their holdings if they wanted to without having first bought into another cryptocurrency from another company owned by Bankman-Fried.

Read this also: Bitcoin for Beginners: Everything You Need to Know

The story of FTT.

Any currency that is created without a corresponding physical asset or value to support it will eventually be worthless.

While there isn’t much use for this token, FTX said FTT holders could expect preferential access to their trading platform (lower fees, no-cost withdrawals, etc). That seemed like a good reason to buy in.

The token began to rise in value—a trend that only got stronger as the trading company used a portion of its transaction fees to buy back (“burn”) tokens. FTX began to sell more and more FTT tokens. As their value increased, more people bought them. This created a self-reinforcing cycle: FTX had to buy back tokens from its customers with the proceeds from its trading fees, which in turn drove up the price of FTT even further.

This sounds great, but how does FTX benefit from this? Well, Alameda is the key to understanding that. For almost 3 years now Sam (the founder of both companies) has convinced everyone that there isn’t any funny business going on between them—however, it is clear that there is. The way it works is this: Alameda sells their FTT tokens back to FTX at a discount. FTX then uses those tokens to pay for their own operations (which are minimal) and then resells them on the market for profit.

But Alameda’s ownership of FTT tokens was a big secret. No one knew how much they had, but everyone knew that the price for these assets began rising when people started using them to trade on exchanges.

When the balance sheet grew, so did their ability to borrow money. The bigger your assets are, the more capital you have and therefore can deploy into loans—and if a firm does this in hopes of making even bigger returns from trading prop positions? Well, that’s a huge win!

So it seems Alameda bought FTT tokens at low prices. Waited for its value to explode, then used these highly inflated tokens as collateral in order to borrow “real money” from other companies—who on earth is offering loans that involve accepting a cryptocurrency as collateral?

No one knows the true source of funding for it, but some people believe that FTX contributed at least in part.

Then why is FTX in trouble?

So the real question here is — What gave way to the panic?

Alameda’s balance sheet was leaked to CoinDesk six days ago, revealing for the first time how many FTT tokens Alameda actually held.

They reported — “As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $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 they’re saying that most of the assets are in FTT—whose value could go down if financial troubles hit. And if FTT goes bankrupt then Alameda would be in a lot of trouble too!

That is what happened. Once people began seeing this story, they realized how precarious the situation was: both companies could capitulate very quickly. So they started withdrawing their deposits from them and putting them in other banks instead.

But it wasn’t until Binance’s founder sent out a tweet that smashed any hope Sam Bankman-Fried had of salvaging his company.

How does the failure of FTX impact others?

FTX has received support from a number of high-profile investors, including SoftBank Vision Fund, Tiger Global Management, and Sequoia Capital. Now, the venture capital firm Sequoia has written down its total investment in FTX to $0 — marking the end of the company’s rise as an American unicorn.

Then there’s the inner circle: 10 people who have lived with Bankman-Fried and run companies out of the Bahamas.

CoinDesk reports that the group was made up of friends and former colleagues of Fried’s, with all being closely tied to Bankman-Fried. It is likely they too are suffering heavy losses right now.

“Some employees kept their life savings on FTX,” an unnamed employee told CoinDesk. “We trusted that everything was fine.”

Binance is a global crypto exchange run by 45-year-old Chinese-Canadian billionaire Changpeng Zhao aka CZ. And CZ and Sam had been friends, but something changed in their relationship when Binance started growing at an exponential rate.

After only six months of operation, Sam set up FTX. CZ took a sizeable stake in the upstart and soon his bet paid off: FTX grew in popularity, raised lots of money from outside investors—and its valuation soared!

In 2021, however, Sam rebought Binance’s shares from the company. Both founders declined to explain why their relationship ended—but regulatory concerns likely played a role in forcing them apart: at the time of their breakup, fears were growing that regulators might target Binance over cryptocurrency issues.

And despite the rumors, Binance and FTMH operated as amicable business partners. About a year after their separation, Binance made $2.1 billion from its investment in FTX by selling off that stake to investors through an ICO (Initial Coin Offering).

But there’s a caveat to all this: not the deal was partially paid in FTT tokens, which CZ kept for himself.

Meanwhile, Sam has begun to whisper nasty things about Binance to US regulators. He even took a jab at CZ—the CEO of Binance and openly questioned whether he’d be allowed into Washington DC.

The moment a damning report on Alameda’s balance sheet appeared in the media, CZ pounced. He announced that he was going to sell all of his FTT tokens citing recent concerns.

This put the few investors who held FTT on edge. If he dumped that much of his FTT in such a short amount of time, it would send the price tumbling into oblivion—and if that happened Alameda’s balance sheet would be wiped out instantly.

If this happened, they’d suffer badly and the contagion would quickly spread to FTX. They had loaned out their customers’ deposits in order to make loans with Alameda.

Within 72 hours of withdrawing $6 billion, FTX stock began to fall.

But then, just when it looked as though the end was nigh for FTX and its market cap, CZ stormed back once again with a late-minute offer to buy out its competitor.

He is now known as the lender of last resort. Not technically a lender, but he has backstopped this deal by telling everyone to remain calm and providing signals that if they still plan on moving out of FTX altogether, then he will pay them in full.

Many hope that this will help to stop the panic.

On Wednesday night, Binance announced on Twitter that it was terminating its partnership with FTX.

It said, “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX. In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”

FTX took a turn for the worse as hundreds of millions of dollars were withdrawn from the crypto exchange within hours of filing for bankruptcy.

A hacker stole $400M from FTX this weekend. Here's what we know so far

Over $600 million was transferred from the FTX crypto wallet on Friday night. Shortly after, FTX said on its official Telegram channel that it had been compromised, asking users not to install new upgrades and removing all FTX apps.

“FTX has been hacked. The FTX app is malware. Delete them. The chat is open. Don’t go to the FTX website because it can download the Trojan,” an account administrator wrote in the FTX Support Telegram chat. Post pinned by FTX General Counsel Ryne Miller.

Read this also: Blockchain technology 101: A beginner’s guide

Effect on the Cryptocurrency market.

The cryptocurrency market has suffered a $2 trillion crash this year, which is tough for investors.

The FTX drama is creating a ripple effect throughout the crypto industry: it sent values down 12% over the course of one day, according to CoinMarketCap. And now there are fears that crypto is about to have its own Lehman Brothers moment—a reference investors might remember from 2008 when investment bank collapsed and kicked off an economic crisis in America.

Furthermore, if confidence in the industry is shaken by the FTX meltdown — experts call this contagion — people may withdraw their crypto assets out of fear.

Analysts at JPMorgan wrote Wednesday that it looks likely a crypto reckoning is coming, cautioning investors to be prepared for major price fluctuations.

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