The catastrophic meltdown at crypto titans FTX and Alameda Research has rocked the cryptocurrency world for the past two weeks. The rumor that the pair had blurred the lines between user deposits and their investments soon became a cascade of events that sent shockwaves through the industry. Bitcoin and other cryptocurrencies were sent into a downward spiral after the implosion, putting November 2022 in the history books as one of the worst months in crypto history.
But what really caused FTX’s downfall, what was the impact and why is bitcoin falling?
The final quarter of 2021 proved to be the start of what has since emerged as a wild downtrend for the bitcoin and crypto markets. Despite hitting a staggering $69,000 almost exactly a year ago, Bitcoin is down nearly 75% from its all-time high. The entire cryptocurrency market peaked at $3 trillion around the same time in November last year, but has lost almost $2.2 billion in value over the past year.
2022 has proven to be a challenging year for global investors as both Russia’s invasion of Ukraine and governments’ massive fiscal stimulus during the Covid-19 lockdown have resulted in high inflation in countries worldwide. In order to bring the inflation rate down to an acceptable level, central banks have been raising interest rates, which is having a negative impact on asset markets such as stocks and crypto.
Since the beginning of the year, cryptocurrencies have trended down in value across the board, revealing vulnerabilities for some players in the industry. The collapse of Terra Luna in May caused a significant impact across the crypto space, wiping nearly $60 billion from crypto markets in a matter of days. Numerous companies were directly affected; In particular, Celsius, Voyager and 3 Arrows Capital filed for bankruptcy after the incident.
By October, crypto markets had finally started to shake the dust off Terra’s collapse and the space seemed to be heading in a positive direction. However, on November 2, 2022, CoinDesk ended the brief moment of dormancy by revealing that giants FTX and Alameda Research appeared to have put themselves in a risky position. A cascade of events soon followed, sparking mass hysteria in the crypto world and sending Bitcoin’s price skyrocketing as investors panicked to sell off their assets to salvage whatever money they had left.
A bit of background: FTX implosion explained
Sam Bankman-Fried, better known as SBF, is a crypto mogul best known for founding exchange giant FTX and quantitative trading firm Alameda Research. CoinDesk revealed that while Alameda Research and FTX were said to be separate companies, the balance sheets of these companies were intertwined. Alameda Research’s holdings were dominated by the token of FTX, denoted by the ticker symbol FTT.
A few days after this information surfaced, a rival exchange and investor in FTX, Binance, announced that they were selling all remaining $580 million in FTT holdings. Of course, the price of the FTT token crashed after the news. This price drop caused immediate panic among FTX users and a “bank run” on the stock market ensued. After just $4.5 billion in crypto assets were removed from the FTX platform, withdrawals stopped being processed without warning.
This situation left $10 billion in user funds trapped on the exchange, potentially affecting millions of users. Fearing the worst, some affected crypto investors began selling their remaining assets to get out of the market, prompting a rapid decline in Bitcoin and cryptocurrencies across the board. Rival exchange Binance briefly stepped in, offering to buy FTX and settle its liabilities; However, after less than a day of due diligence, they announced that the problems are beyond their “ability to help.”
After that, Chinese crypto mogul and founder of TRON, Justin Sun, offered to support all FTX deposits from TRON-based tokens. Seeing a way out, users immediately flocked to buy and withdraw the Sun-backed tokens, sending the price on the platform up nearly 50 times the original price. Of course, when taking off, this meant an instant loss of up to 99%. Many FTX users decided that taking this loss was better than leaving assets on the exchange.
FTX has since filed for bankruptcy both in Australia and abroad, suffered an alleged hacking attack on nearly $1 billion in user funds and is now under investigation by the Bahamas government for criminal misconduct. Quite a downfall indeed.
Effects of the FTX meltdown
The collapse of the SBF empire has far-reaching consequences for the crypto industry. FTX and Alameda Research were considered industry powerhouses and had investments or debts with many companies in the space. Other companies affected by the FTX collapse have already begun to come forward and halt user withdrawals from the platform while they determine the extent of the damage.
Aside from the direct impact of FTX’s dealings with other companies, there was also a degree of mass hysteria and panic. Some crypto investors have all but lost faith in centralized platforms and exchanges, and are frantically withdrawing every penny they can from their accounts. Massive exchange outflows show the extent of this loss of confidence, with over $3.7 billion worth of Bitcoin being removed from exchanges, along with billions of dollars in other currencies.
Some users may have been so shaken up by the disaster that they may decide to sell their assets and exit the crypto space entirely. The fall in price of many crypto assets suggests that this could be a definite possibility and could be one of the reasons behind Bitcoin’s decline. However, despite last week’s negative impact, there are some positive takeaways.
A key takeaway will be the need for improved regulation for centralized crypto exchanges to ensure proper management of user funds. SBF brought the case to regulators, who proposed a light touch that benefited FTX and hurt competitors and decentralized finance applications the most.
Another key takeaway for crypto investors is that centralized platforms aren’t necessarily the safest places to store crypto: those who chose to store their crypto assets in their wallets were unaffected by last week’s events and still have access to their cryptocurrencies. Some may be so affected by the collapse of FTX that they choose this storage method in the future. Definitely watch this space.
This article is not an endorsement of any particular cryptocurrency, broker, or exchange, nor is it a recommendation of cryptocurrency as an asset class.
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