You should have read the headlines of crypto exchange, FTX, running into liquidity issue and is in talks for Binance to buy it out. Investors thought the worst was behind them, only to have met with another major blow. And this blow is a big shock.
Here’s why.
#1 FTX is huge
FTX at one point was the second largest crypto exchange, behind Binance.
FTX’s impact to the crypto ecosystem ranks amongst the top casualties:
- Terra Luna – $40 billion
- FTX – $32 billion (last valuation in Feb 2022)
- Celsius – $25 billion
- Three Arrows – $10 billion
#2 Sam Bankman-Fried had a god-like status in the crypto world
Founder and CEO of FTX, Sam Bankman-Fried (SBF) has gained a lot of clout and a positive image over the years.
He built FTX into the second largest exchange and amassed a $15.6 billion net worth. He gave away money which shows he has a good heart.
He appeared in media often and recently on David Rubenstein’s show, which only features the movers and shakers in the world.
He is soft spoken and humble, not like Do Kwon’s brash personality. Such a nice and powerful person, he can’t do any wrong?
Right?
#3 High profile investors have backed FTX
FTX has a suite of powerful investors including Temasek, Softbank, Sequoia Capital, BlackRock and more have poured $1.8 billion into it.
These top tier investment firms must have done their due diligence?
With so many pairs of eyes looking at the investment, they shouldn’t have missed anything?
#4 FTX was saving other failed crypto firms
FTX was the white knight that have saved crypto firms from dying. It was a savior who helped to stabilize the market.
FTX lent $120 million to Liquid and bought it for an undisclosed sum thereafter. It acquired Voyager for $1.4 billion.
To make these acquisitions, FTX should have the financial muscles right?
With this image, you can see that FTX is probably one of the last crypto firms people think it would fail. Yet, it ran into liquidity issues.
What happened?
The weakest link was the sister company, Alameda, who holds about half of its assets in FTT (FTX tokens).
Binance held $2 billion worth of FTT as part of its early investment in FTX separately. It decided to dump it because Binance said FTX has been lobbying regulators against it. That is a huge dump and caused FTT price to drop double-digit in a day.
More investors sold FTT and Alameda’s value plummeted, which implicated FTX as it held FTX customers’ deposits.
It is only now we know how bad the risk management was – the reserves were not backed by stable currencies but volatile tokens and in such a huge position. The vulnerability was understated. FTX’s collapse might cause investors to withdraw from other exchanges too – if FTX can fail, the smaller ones definitely could.
As the story continues to unfold, the crypto market may plunge into a much deeper and longer winter.
And trust is even harder to regain.
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