There was a time when mining gold was a competitive and lucrative business. Those who could mine the most, went on to become the wealthiest. They were considered noble and powerful. In search of these riches, people were all about mining gold. Leaving everything behind, they would topple caves and carve stones looking for even a little bit of gold. Thus the word ‘Gold Rush’ was born. Cryptocurrency is the modern day gold rush. While the value of crypto, especially of bitcoin, went through its fair share of ebb and flow; it still remains popular among those who seek its riches.
For the past few years, cryptocurrency has been one of the center of attention for multiple reasons. In the early October of this year, it again started a buzz in the community. This time it was not the currency itself, but one of the leading crypto exchange platforms called FTX. The crypto exchange system was founded back in 2019, when the value of various currencies were at their peak. It was founded by its CEO Sam Bankman-Fried. By creating a centralized crypto exchange system with low fees and the platform being basically built by the traders, Sam Bankman-Fried became known as the savior of crypto. But in early October, the entire system of FTX came crashing down. And similar to all stock exchange anomalies, the price of crypto everywhere took a tumble downwards as well.
Mr. Bankman-Fried previously launched Alameda Research, which became a prominent participant in crypto market creation and institutional trading before launching FTX. Later on, Bankman-Fried would go on to create FTX leaving the helm of Alameda Research to Carolina Ellison. But although he was not in direct control of Alameda’s operations, Bankman-Fried still was the 90% owner of the company. Alameda also traded in FTX. When cryptocurrency prices fell earlier this year, Alameda’s daring bets turned bad. In the face of impending disaster, Bankman-Fried took the catastrophic choice to lend billions of dollars in client assets to assist Alameda bridge its financial deficit.
On November 2, CoinDesk released an article that called into doubt the financial viability of both FTX and Alameda. It stated that FTT, the exchange token used by FTX, made up a large portion of Alameda’s balance sheet. Following this, the customers started pulling their money out of FTX. It resulted in the company being crunched for money. In this moment of escalation, FTX was decided to be sold to Binance, another crypto exchange platform. Perhaps this was the final domino to fall after a chain of events.
The fall of price is a combination of toxic decision making. It was the very toxic mix of the Binance crypto exchange, the Tether stablecoin, and competent professional traders running high-frequency algorithms. Unlike stocks, bitcoin may be traded on a variety of exchanges, but because Binance controls more than half of the crypto market, it determines the value of bitcoin and other cryptocurrencies. To purchase cryptocurrencies, traders must first convert fiat money into a stablecoin such as tether. Because one dollar typically equals one tether, trade on bitcoin-tether determines the dollar value of bitcoin. However, when bitcoin fails, the entire crypto economy crashes.
The problem is that Binance is solely self-regulated, which means it is not controlled by traditional market authorities like the Securities and Exchange Commission in the United States or the Financial Conduct Authority in the United Kingdom. This is a big draw for professional traders since they may use Binance to deploy high-frequency price manipulation algorithms, which are illegal in regulated marketplaces. These algorithms can produce dramatic price fluctuations, making bitcoin exceedingly volatile.
So Binance is definitely a prominent figure in the world of crypto with a vast control. FTX, being in a financial pinch, was to be sold to Binance with hopes to resurrect its former glory. But when Binance backed out from their purchase offer, everything came crashing down for FTX. The company officially filed for bankruptcy in November. As a consequence, thousands of customers who had their holdings deposited to FTX, face tremendous financial jeopardy.
Long has the Bitcoin business fought to persuade authorities, investors, and regular users that it is reliable. The collapse prompted inquiries by the Justice Department and the Securities and Exchange Commission into whether FTX inappropriately utilized client cash to support Alameda Research, the first trading business created by Bankman-Fried. When the cryptocurrency market crashed by $2 trillion in May, FTX provided financial lifelines to numerous struggling companies. Its demise has reverberated throughout the sector, with lenders like BlockFi and Genesis announcing suspensions in operations. Since November 8, the value of FTT, a native cryptocurrency unit for FTX, has plunged by more than 90%. This month, the price of Bitcoin has fallen by roughly 19%, while the price of Ether has fallen by nearly 24%.
According to CoinGecko, FTX was at the heart of the crypto ecosystem as the largest cryptocurrency derivatives exchange and one of the top spot exchanges, with a total daily volume surpassing US$16 billion. Its failure has serious consequences for many industry stakeholders. Many consumers raced to remove their valuables from the exchange after hearing reports about FTX’s collapse. The exchange cleared $2.8 billion in departures in a single day on November 7. These outflows only include Bitcoin (BTC), Ether (ETH), USD Coin (USDC), and Tether pairings; other cryptocurrency withdrawals are not included.
According to Arkham Intelligence data, the value of FTX’s asset holdings in its public Ethereum wallets decreased from over US$8.4 billion just days before the bank ran to less than US$700 million as of November 16. Massive client withdrawals, along with market players short-selling FTX’s FTT token – worth more than US$6 billion when priced at US$25 per FTT – caused the exchange’s reserve balance to plummet dramatically overnight.
Although FTX had a substantial number of liquid and semi-liquid assets in its public wallets, the bulk of them were held in its own FTT token, as well as other FTX-backed Solana ecosystem tokens such as SRM, MAPS, and OXY. The platform’s wallet private keys were obtained and then hacked, resulting in a further US$600 million being taken from its reserves. FTX had over 5 million registered members by the end of 2021 and topped at 1 daily active users on its platform, therefore the immediate impact on retail consumers who held their crypto assets on the exchange was severe.
Having said that, several well-known institutional trading businesses, venture capital, and market participants were not immune. According to their public disclosures, these big investors and organizations have direct exposure to FTX ranging from as little as $4.3 million to as high as $290 million. Other centralized finance (CeFi) organizations are suffering a liquidity shortage, in addition to direct vulnerability to owning assets on FTX. Withdrawals have subsequently been blocked by cryptocurrency lenders Genesis, SALT, and BlockFi, alleging liquidity concerns caused by FTX’s demise.
In the world of cryptocurrency, there is a saying that goes, “Not your Key, not your crypto”. It is expected that the initial reaction for customers of centralized exchanges will be to transfer ownership of their assets to their own private wallets. As consumers lose faith in centralized custodial systems, we observe a business flight of money from all large centralized exchanges, as well as a considerable drop in trading volume, not long after FTX’s demise. As more users migrate to the blockchain, we may see an increase in the adoption of decentralized finance (DeFi) trading protocols as consumers are hesitant to take on custodial risk.
Even before the FTX crash, the crypto market was in a terrible spot. Cryptocurrencies have been on a steady decline since reaching stratospheric highs in November 2022, with Bitcoin falling from $69,000 to approximately $18-20 thousand being a prime example. Despite this, the majority of those affected by the disaster were investors rather than traders. A crypto market meltdown always causes massive volatility in the market, giving traders the opportunity to make large returns with modest cash. The FTX crash boosted this volatility even more, which may be considered as a good from a trading standpoint. Because of the high volatility, the prices of tokens fluctuate throughout the day, and many traders profit from this.
Author- Shiddhartho Zaman
