FTX - all the explanation! What will happen now?
Nov 18, 2022
FTX, one of the largest and most respected cryptocurrency exchanges in the world, has collapsed like a house of cards, leaving small and large investors empty-handed and generating an avalanche of doubt, mistrust, and panic.
To understand how we got to this we have to go back a bit. One of the main figures in that story is Saint Bankman-Fried who until recently was one of the richest people in the world. Sam was a key figure in the creation of Alameda Research, an Investment Fund, formed in 2018 that used quantitative analysis strategies and was relatively successful. So far, everything was going well. In 2019, FTX emerged, a cryptocurrency exchange behind which San Bankman-Fried was also behind.
Alameda and FTX were in theory different institutions in practice, however, this was not the case.
It turns out that during the year 2021 in the middle of the bull market where everything was going up like foam, Alameda began to invest in increasingly risky businesses and as the market did not stop rising, they believed they had found the perfect way to generate unlimited profits. Alameda began to leverage more and more, that is, to speculate with credit, everything indicates that it began to use FTX funds to speculate in the market. For a while, it worked perfectly for them, but problems were not long in coming.
First of all, Alameda did not have to be using funds from FTX users when creating an account with FTX, we were assured that we controlled the funds in our accounts and that FTX would not use these funds as if they were its own funds. But that was not the case as Alameda used the money from FTX clients. That explains part of the problem, but how did they lose so much money?
It is not yet known for sure what the actual hole in the accounting books is, but it seems that Alameda would have a deficit between 8 and 15 billion dollars. And how did they lose them?
For now, we cannot do more than speculate and gather partial information since the process against FTX and Alameda has not yet concluded. Some analysts affirm that Alameda had been strongly affected by the collapse of LUNA and that for this reason, it would have been trying to rescue companies like Voyager, not for the good of the industry but to save itself.
Another big problem is that Alameda borrowed from FTX using $FTT as collateral, which is FTX's native touch. This is as if a bank granted loans to itself, using shares of the same bank as collateral.
One of the crucial moments in this story came when Alameda's accounting information was leaked, which was published in a CoinDesk article and in it, it was stated that Alameda had brutal liquidity problems, since most of the assets that they held were highly illiquid assets.
What does this mean?
Alameda had a bunch of tokens valued at several billion dollars, but the problem is that when trying to sell them, the sales would directly affect the price of said tokens, causing their value to plummet or in other words, the value they had. these tokens in books were very different from the market value because what is the use of having an asset that in theory is worth a lot, if when trying to sell it its price could possibly collapse, given the enormous amount you have of it and the little demand there is in the market.
Around this time, CZ, the CEO of Binance decided to attack and published an announcement saying that Binance would sell all of its $FTT tokens.
CZ's goal was undoubtedly to hurt an opponent like FTX who was not only one of his biggest competitors but had been playing dirty, using his political connections. What CZ didn't know at the time was that things were so bad. When CZ began to be repeatedly attacked against FTX the $FFT token began to collapse and this, in theory, would not be such a serious problem, if Alameda had not been so indebted and had not been using the funds of the Exchange clients. The fact that the $FTT token loses value, in theory, would not have affected FTX's main business, which is charging purchase and sale commissions to its users. The main problem was that FTX had lent its clients' funds to Alameda, who in turn had become massively in debt and his only support was a handful of tokens, very, very illiquid including $FTT.
As the price of $FTT fell, the more volatile situation in Alameda.
In the end, the stocking ended up collapsing and San Bankman-Fried gave up. He called CZ and they both closed a non-binding agreement in which Binance would acquire FTX and all of its assets. Binance would win the war, FTX would come out on top and solve its liquidity problem, and happy ending.
Unfortunately things did not end like this. When Binance had access to the FTX books, they realized that the magnitude of the problem was much greater. The issue was not that FTX had liquidity problems, but that it was a totally insolvent company.
What does this mean?
Imagine that you take a loan that you are unable to pay. Suppose, however, that you have a car whose value is much higher than the debt. In such a case you simply have a liquidity problem, since you cannot immediately repair the credit, but you have the means to do so in the future. You just have to first find a buyer who is willing to pay a fair price for your car. That was what Binance and everyone believed was happening with FTX, which did not have sufficient liquid means to pay off its debts but had valuable assets worth bailing out.
However, that was not the case. FTX not only had no car to back its debts, it had a multi-billion dollar hole in its books. That is why it is said that it was not a liquidity problem but a solvency problem. Debts far exceeded the price of their assets. That is why Binance announced that it would not be acquiring FTX because it does not make much sense to acquire a company that has nothing but debt on its books.
FTX ended up declaring bankruptcy and freezing withdrawals from its platforms.
You might think that after all this, things couldn't get any worse, but they certainly weren't. After all this drama it turns out that there has been a huge hack and around 600 million dollars was stolen from what little assets FTX still had. There are many rumors about this hack and it is not yet known for sure who is behind it, but it has been revealed that Sam and his team had built backdoors into their platforms to be able to move funds without alerting the market and that is why there is speculation. that it could be an internally executed robbery. This case has not yet been fully resolved.
Where is Sam?
There were many rumors that he would have fled to South America and I don't blame him as we have the best climate in the world and incredible landscapes. But this turned out to be nothing more than rumors.
Other media claim that he would have been arrested in The Bahamas and that he planned to flee to Dubai, but nothing is known for sure yet.
Sam, for his part, has done nothing more than constantly communicate on Twitter, where he basically says that he was wrong and that he used much more leverage than he had planned or believed and assures that it was possible to repair the people affected.
Some people believe that he is truly sorry, others believe that he is simply doing what he can to wash his hands of it and escape the doom that may await him.
The key question now is:
What will happen from here on?
Something that of course, no one knows for sure. However, there is a very important point and it is the possible impact that the fall brings with it. Let us remember that after the fall of the moon a domino effect was unleashed that caused many other companies that were leveraged to end up being liquidated, as the price of the various cryptocurrencies fell, which in turn unleashed new liquidations and more sales. This is how companies such as Celsius and Voyager ended up going bankrupt, but also investment funds like Tree Arrows Capital, to mention a few examples. The fall of FTX could generate a similar domino effect, in recent days we have already seen significant falls in the price of most crypto assets and this could extend in the future since companies that are leveraged could find themselves in difficulties.
And this is not just speculation. A few days ago BlockFi, a cryptocurrency lending company that allowed users to deposit funds, and in exchange generate interest, announced that they will not be able to operate normally and that they have been forced to freeze withdrawals from their platform.
Such a decision is never taken lightly. So far, the vast majority of companies that frozen withdrawals sooner or later ended up going bankrupt and that is why this is bad news for users, but also for BlockFi investors. If more and more companies begin to be infected by this series of insolvencies, it is most likely that many of them will begin to liquidate their funds to cover their debts, which will mean that since there is a greater supply of cryptocurrencies in the market, the prices continue to fall affecting other companies in similar situations. It is a vicious circle since the more prices fall, the more companies that have leveraged will have liquidity problems, which will generate insolvencies, more sales and more falls in prices.
I don't want to be the alarmist, but we could still continue to see falls, and some rumors have started to show that other centralized exchanges could be in a situation similar to that of FTX. At the same time, rumors that most of these Exchanges have come out to deny stating that they will publish reserve tests as quickly as possible, something that will undoubtedly contribute to generating more transparency and more security. Hopefully, they manage to do it as soon as possible before fear spreads to more and more investors. The silver lining to all of this is that exchanges will be forced to become much more transparent and publish proof of reserves that can be independently audited which will make this industry much more robust in the future.
The best we can do for now is withdraw our funds from the Exchanges and keep them in wallets that we control ourselves, at least while the reserve tests are published.
Even the CEOs of various Exchanges remind us of this:
Remember: It's not your keys, it's not your money!
A few days ago I even withdrew my funds from Kucoin. After all, I was not trading and they were there for fun. So better in my wallet. Unfortunately, I don't have a LEDGER wallet to store them more securely and it's not like there are thousands or millions :)
Important Note: This is not FUD at all. It is my criteria and my way of seeing things, which may or may not coincide with yours. Investigate for yourself and analyze the situation, so that you make the decision that you think is most convenient for you.
Resources:
Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet
Sam Bankman-Fried is ‘under supervision’ in Bahamas, looking to flee to Dubai
BlockFi Prepares for Potential Bankruptcy as Crypto Contagion Spreads
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Disclaimer: This article is presented as it is, it is my personal opinion. There is no plagiarism in it and the sources have been referenced.
See you tomorrow!
Damn! The situation is actually worse than I thought. Thanks for this article, I have always wondered about the full story with FTX cos I only knew bits and pieces about what truly happened but your article has explained things better for me. It looks like things will get much worse over time and at least now I know what to expect