FTX was a prominent crypto hedge fund that recently filed for bankruptcy in November of 2022 due to financial failures that stripped the company of its ability to operate. Although this might seem like a recurring story of a company’s swift rise to fame and demise, FTX’s story is embedded in federal crimes such as money laundering and embezzlement that led to their massive fall at the cost of billions of dollars. Sam Bankman Fried, the CEO of FTX, was recently sentenced to 25 years in prison for the crimes he had committed during his time at FTX, but the real questions are being asked about the nature of his crimes: what was FTX, what caused their downfall, and what does the fall of FTX mean for the rest of the crypto industry?
What was FTX?
FTX was a crypto exchange company founded by Sam Bankman Fried in 2018. This company seemed to have had a lot of promise when it first launched since Sam Bankman Fried was an MIT graduate who had credibility from his time as a full time employee at the proprietary trading firm Jane Street (Investopedia 1). FTX offered services that made crypto investments very simple, allowing their users to buy and sell cryptocurrencies through a digital wallet that would monitor crypto investments, make recommendations towards which investments had greater potential, NFT’s (digitized Non-Fungible Assets), and more. The company gained popularity due to a combination of their lucrative products and aggressive marketing campaigns (TechTarget 1). FTX used calculated marketing campaigns by purchasing Super Bowl ads, gaining celebrity endorsements from stars such as Stephen Curry and support from popular venture capitalists such as Kevin O’ Leary. All of these combined attributes of FTX propelled them to reach a peak valuation of nearly $32 billion dollars in 2022 (Forbes 1), however, their downfall rapidly approached them after this milestone.
What caused the collapse of FTX?
Although FTX had grown to a valuation of $32 billion, the company was essentially built on a mountain of lies. It was revealed in an article by Coindesk that funds that were invested by customers were not going to FTX, but to another cryptocurrency trading firm centered in Hong Kong called Alameda Research, which was also founded by Sam Bankman-Fried (TechTarget 1). This was a problem because Alameda Research gained funding by taking the customer funds away from FTX, which meant that FTX was not only committing money laundering, but Alameda Research was stealing customer assets from FTX without giving any return on investment, causing a loss for the customers of FTX. On top of this, it was also revealed that Sam Bankman-Fried had lied about the net worth of FTX. Because FTX was a private company, they were not compelled to reveal their balance sheets; however when these documents were leaked, it was revealed that the company had $9 billion in liabilities, and only $900 million in assets, which was much less than Sam Bankman-Fried had previously stated (TechTarget 1). In order to save FTX from fully being disgraced, Binance, a competitor crypto exchange company, agreed to buy out FTX, however, the deal fell apart due to federal investigators from the US government looking into the extent of the crimes committed by FTX. In November of 2022, FTX filed for bankruptcy. IN December of 2022, Sam Bankman-Fried was arrested, and multiple class-action lawsuits were launched against the company on the grounds of misuse of funds and demanded billions of dollars in reparations.
How has the fall of FTX impacted the Crypto Industry?
The FTX scandal has caused immense damage to the reputation of the crypto industry. After peaking at $3 trillion in 2021, the value of the crypto market fell in 2022, hitting a two-year low of $796 billion as FTX reached its demise, meaning there was a loss of over 2 trillion dollars in the crypto market (Reuters 1). Along with this, venture capitalist investment in crypto companies also drastically reduced, with investments going down from $6.12 billion dollars in the beginning of 2022 to a lowly $704 million by the end of 2022. The fall of FTX also caused more than 100 affiliated crypto exchange companies to file for bankruptcy, and caused hundreds of investment firms to lose millions of dollars due to their investments in FTX completely falling through (Investopedia 1). A plethora of cryptocurrencies that FTX was exchanging and trading in also tanked in value, such as Bitcoin, Ethereum, and FTT. The amount of users trading in cryptocurrencies also significantly decreased, where the crash of FTX immediately led to reduced consumer trust and stability.
The Future of Crypto
The fall of FTX tarnished the prestige and reputation of the crypto industry. The fall not only heavily damaged famous cryptocurrencies such as Etherum and Bitcoin, but also caused the complete shutdown of crypto exchange companies such as BlockFi, Three Arrows Capital, and more (Reuters 1). Despite this major setback, the crypto market is still looking hopeful as new investment opportunities arise. Several major financial firms such as BlackRock and Fidelity are filing applications for spot Bitcoin ETFs, which are funds that track the value of a cryptocurrency, almost like a stock, and can bring in billions of dollars for institutions (Reuters 1). With new investment opportunities, and new regulations, the crypto market appears as a fluctuating area of investment due to the constant major changes happening that drastically affect the viability of the crypto market as a whole.
