The FTX Crypto Exchange Collapse: Lessons We Should Learn
, 2022-11-10 09:58:00,
Something crazy just happened. FTX, formerly the second-largest cryptocurrency exchange, collapsed overnight. It went from a valuation of around $16 billion to a negative valuation due to a liquidity crunch and debt. How did this happen?
FTT, a crypto coin that the FTX exchange issued, plummeted in value because Binance, the largest cryptocurrency exchange, said it was liquidating FTT. FTT then proceeded to plummet in value, thereby causing a crisis of confidence in FTX as clients withdrew billions of dollars.
Binance, which caused the panic in the first place, then said it had signed a non-binding Letter of Intent to purchase FTX. But after reviewing FTX’s books, Binance backed out and has left FTX to collapse, thereby eliminating one of its largest competitors.
Given it’s an exchange, it’s difficult to understand how FTX could collapse. Apparently, FTX now owes billions to its clients and doesn’t have the money to pay up. Where the hell did its customers’ funds go?
Supposedly, FTX’s founder, Sam Bankman-Fried’s hedge fund, Alameda Research, owned a bunch of FTT, the coin FTX created. FTT was posted as collateral which enabled FTX to use its client’s funds to invest in something else. When FTT collapsed, FTX was left with a massive liability.
This is akin to brokerage Charles Schwab using your cash and investments to invest in something speculative in a Schwab family sister company, losing it all and not being able to make you whole….
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