FTX: Hero to Zero in 24 Hours

Crypto investors have endured more than their fair share of sudden market meltdowns this year thanks to shocking revelations about poorly managed crypto projects.

This week brings yet another seismic disruption. This time it’s FTX—the fourth largest crypto exchange in the world—which until just last week, was considered to be an industry stalwart.

Facing a rapidly worsening liquidity crunch, FTX is hunting for a solution to save the business. At the heart of the issue is FTX’s native token, FTT, which has been eviscerated in a huge sell-off, plunging more than 80% in the past few days.

In a rapid series of events that unfolded largely on Twitter, FTX attempted to sell a large part of its operating business to rival Binance after a wave of withdrawals threatened to take FTX down. But just as quickly as Binance offered its rescue package in the form of an acquisition,  the company retrenched it.

“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” said Binance CEO Changpeng “CZ” Zhao in a Nov. 9 tweet, only a day after offering a bail-out package.

While Binance was an early backer of FTX, it’s also been a rival, an extremely odd position.  So it shouldn’t be very surprising that the non-binding agreement that Zhao offered Sam Bankman-Fried’s FTX exchange evaporated quickly, leaving FTX in peril.

In terms of the recent maneuvers by Binance, Bankman-Fried said in a Nov. 10 tweet, “At some point I might have more to say about a particular sparring partner, so to speak. But you know, glass houses. So for now, all I’ll say is: Well played; you won.”

What Happened to FTX?

Bankman-Fried’s FTX was valued at $32 billion only a few months ago. The MIT grad is one of crypto’s most recognizable figures, a self-made young billionaire with a crypto empire comprising FTX and investing firm Alameda Research.

The purpose of Alameda Research is to act as a liquidity provider on FTX. In 2019, when Bankman-Fried launched FTX, he tweeted, “Alameda’s incentive is just for FTX to do as well as possible.”

Until now, FTX had managed to avoid the liquidity crisis that plagued crypto earlier in 2022 after a wave of contagion rocked the market in the wake of the $60 billion collapse of stablecoin TerraUSD.

Much like governments bailed out banks that were too big to fail during the 2008 financial crisis, Bankman-Fried extended offers of emergency liquidity to crypto companies caught up in the carnage.

Styled as an altruistic superhero with the acronym SBF, Bankman-Fried’s Alameda stepped in as a lender of last resort to crypto firms such as Voyager Digital and Celsius, went down the drain and threatened to take huge parts of the crypto market along with them.

The Trouble Started with FTX’s Native Token, FTT

Ironically, it appears that FTX was built on a house of cards not dissimilar to TerraUSD. Like many other exchanges, FTX supported its own crypto token, FTT, designed to support its various projects.

Owners of FTT could use the token to obtain discounts on trading FTX trading fees or for staking to earn income from their holdings. It’s not an uncommon strategy—Binance, for example, offers two native tokens, Binance Coin (BNB) and Binance USD (BUSD).

But how the token was used to support FTX left SBF’s empire incredibly over-exposed to volatility in FTT.

This week’s tumultuous events are related to a Nov. 2 CoinDesk story that questioned FTX’s solvency. CoinDesk reported that Alameda Research’s balance sheet was stuffed with FTT.

Reportedly, as of June 30, the single biggest asset on Alameda’s $14.6 billion balance sheet was “unlocked FTT,” while the third biggest asset on the books was a $2.16 billion pile of “FTT collateral.”

This suggested that Alameda and FTX were anything but separate businesses, and it left Alameda wildly exposed to volatility in FTT. And that’s the big downside to native tokens: These types of crypto coins are almost completely unregulated and can rapidly fall prey to market losses.

FTT Contagion Moved Fast

Alameda Research wasn’t the only whale with big FTT holdings. Binance owned a sizable position in FTT, stemming from an earlier deal with FTX. Binance dumped its FTT holdings after the CoinDesk report, setting off the chain reaction.

On Nov. 6, Canadian-Chinese billionaire Zhao tweeted, “As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.”

The tweet precipitated a run on FTT and an exodus from FTX. FTT peaked at $78 in September 2021, from around $24 before Zhao’s infamous Nov. 6 tweet sent it crashing to its current trading price of less than $3.

“FTT was outweighed by the declining value of the token and the increased likelihood of total loss by continuing to hold it. Much like the Terra/LUNA tokens earlier this year, it is possible for FTT to become valueless in days,” says Josh Peck, founder of TrueCode Capital.

Binance’s Zhao effectively kneecapped FTX, and his Nov. 8 offer of rescuing the troubled exchange evaporated in less than 36 hours.

Bankman-Fried told Reuters there was around $6 billion in net withdrawals from FTX in the 72-hour run-up before Zhao’s offer. But with Binance walking away from the bail-out deal, the company has suspended any withdrawals and the onboarding of new customers, effective Nov. 10.

The Downfall of a Billionaire

While Zhao ranks among the world’s richest, with a net worth of $16.4 billion, Bankman-Fried is no longer a member of the billionaire’s club.

Bankman-Fried vanished from the Bloomberg Billionaires Index overnight, with his net wealth plummeting 94% to nearly $991.5 million in a single day.

It’s a humbling moment for Bankman-Fried, who became a crypto mogul after a few short years with earning comparisons that rivaled some of the most successful investors in the world.

As of this week, Zhao has become the No. 1 player in crypto.

The Future of FTX and Solana

FTX’s liquidity crisis has thrown kerosene on the crypto market, with contagion spreading as crypto investors fear another shoe will drop.

Over the last five days, Bitcoin (BTC) has dropped 22% and Ethereum (ETH) is down 27%.

Other leading altcoins are also down as well. Most notable among them is Solana (SOL), in which Bankman-Fried is a prominent backer. SOL is down a whopping 26% in the last 24 hours.

“Liquidations in Solana are based on the fact that FTX is a big investor in SOL tokens and could dump the assets to mitigate losses. But the extent to which this can damage Solana is uncertain,” says Miles Brooks, director of tax strategy at CoinLedger.

SOL is a collateral asset, and it’s likely to be liquidated as FTX/Alameda looks to find a way to raise cash.

And while everyone thought the FTX was too big to fail, one thing is for certain, “no crypto firm is immune to the turbulence in the crypto sector,” Brooks summarizes.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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