The catastrophic collapse of crypto titans FTX and Alameda Research has rocked the crypto world over the past two weeks. Rumors that the pair were blurring the lines between user deposits and investments soon escalated into a cascade of events that rocked the entire industry. Bitcoin and other cryptocurrencies went into a downward spiral after the explosion, leaving November 2022 in the history books as one of the worst months in cryptocurrency history.
But what actually caused FTX to crash, what was the impact, and why is Bitcoin falling?
The last quarter of 2021 marked the beginning of a strong downward trend in the bitcoin and cryptocurrency markets. Despite hitting an impressive $69,000 almost exactly a year ago, Bitcoin is down nearly 75% from its peak. The overall cryptocurrency market peaked at nearly $3 trillion last November, but has lost nearly $2.2 billion over the past year.
2022 has been a difficult year for global investors as both the Russian aggression in Ukraine and the massive fiscal stimulus by governments during the Covid-19 lockdown led to high inflation in countries around the world. To bring inflation down to manageable levels, central banks raise interest rates, which negatively affects markets for assets such as stocks and cryptocurrencies.
Overall, cryptocurrencies have been in a downward trend since the year, revealing vulnerabilities for some industry players. The Terra Luna crash in May had a huge impact on the cryptocurrency space, wiping almost $60 billion from the crypto markets in a matter of days. Many companies were directly affected; In particular, Celsius, Voyager and 3 Arrows Capital went bankrupt after the incident.
In October, the cryptocurrency markets finally started to recover from the Terra crash and the market is moving in a positive direction. However, on November 2, 2022, CoinDesk broke a brief silence by reporting that giants FTX and Alameda Research had put themselves in a precarious position. A cascade of events soon followed, causing mass hysteria in the cryptocurrency world and a crash in the price of Bitcoin as panicked investors sold their holdings to save their remaining money.
A bit of history: FTX explosion explained
Sam Bankman-Fried, better known as SBF, is a cryptocurrency tycoon best known for founding exchange giant FTX and quantum trading firm Alameda Research. CoinDesk revealed that while Alameda Research and FTX are separate companies, their balance sheets are intertwined. Alameda Research's holdings were dominated by the FTX token symbolized by the symbol FTT.
A few days after this information was revealed, rival exchange and FTX investor Binance announced plans to sell all remaining FTT assets worth $580 million. After this news, the price of the FTT token naturally fell hard. This price drop immediately caused panic among FTX users, after which the exchange began a "run on the bank". After a total of $4.5 billion worth of cryptocurrency was withdrawn from the FTX platform, the withdrawals were suspended without prior notice.
The situation led to the freezing of $10 billion of user funds on the exchange, which could affect millions of users. Some affected crypto investors feared the worst and started selling their remaining holdings to get out of the market, sending Bitcoin and cryptocurrencies down. Rival exchange Binance briefly stepped in and offered to buy FTX and meet its obligations; However, after less than a day of due diligence, they announced that the problems were beyond their "ability to help".
After that, Chinese cryptocurrency tycoon and TRON founder Justin Sun offered to support any deposit of TRON-based FTX tokens. Upon seeing the leak, users immediately flocked to buy and withdraw the Sun-backed tokens, increasing the price on the platform by nearly 50 times the initial price. This of course meant an immediate loss of up to 99% on take off. Many FTX users have decided that accepting this loss is better than leaving the assets on the exchange.
FTX has since filed for bankruptcy both in Australia and abroad, allegedly embezzling about $1 billion in user funds and is currently under criminal investigation by the Bahamian government. Don't actually fall.
Consequences of the FTX collapse
The collapse of the SBF empire has far-reaching implications for the cryptocurrency industry. FTX and Alameda Research were considered industry leaders and had investments in or commitments to many companies in the field. Other companies affected by the FTX crash have already begun filing lawsuits, suspending user withdrawals from the platform while they determine the extent of the damage.
In addition to the direct impact of the FTX deals on other companies, there was also some mass hysteria and panic. Some cryptocurrency investors have lost faith in centralized platforms and exchanges and are withdrawing every penny from their accounts. The massive outflow of funds from exchanges shows the extent of this loss of confidence: More than $3.7 billion worth of bitcoin was withdrawn from exchanges, as well as billions of dollars in other currencies.
Some users may have been so shocked by the disaster that they decided to sell their holdings and leave the crypto space altogether. The price drop of many crypto-assets shows that this is entirely possible and could be one of the reasons for Bitcoin's decline. But despite the negative results of the past week, there are also positive results.
An important takeaway will be the need to improve the regulation of centralized cryptocurrencies to ensure proper management of user funds. The SBF case attracted regulators, who proposed an easy measure that would benefit FTX and hurt competitors and decentralized financial applications the most.
Another key point for crypto investors is that centralized platforms are not the safest places to store cryptocurrency: those who keep their cryptocurrency in wallets are not affected by the events of the past week and still have access to their cryptocurrency. Some may be so afraid of the FTX crash that they will choose this method of saving in the future. Be sure to pay attention to this area.
This article is not a recommendation of any cryptocurrency, broker or exchange, nor is it an investment grade recommendation.