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Briefly about how FTX crashed

7 min read



‘The fall of FTX and Sam Bankman-Fried has been one of the biggest the crypto world has ever seen. Once a reliable name in the crypt trading market, there is no precedent to see how the entity could recover.’ (.Guru, a crypto outpost)

In the early November 2022, FTX – the one of the biggest centralized crypto exchanges, initially worth $32 billions – faced a tragic and deadly collapse with stunning speed. As it appeared, billions of dollars of investors’ money are missing.

Here’s what happened, why and how it could affect everyone involved.

Context in the market

  • Bear market (a.k.a. crypto winter): investors’ portfolios have been already harshly devalued
  • Massive downfalls of several centralized lending platforms and other projects in crypto industry
    • (3 Arrow Capital, Celsius, Voyager, Luna)
  • No money insurance from centralized exchanges to unsecured investors/traders
  • Lack of customer trust

Triggers of the Collapse

The following triggers have fired the panic and the eventual downfall

  • Coindesk published an article about Alameda’s assets and potential insolvency
  • Binance announcing sell-off of their FTT token holdings, as a risk management measure

Immediate market effects

  • FTT price & valuation crash
  • chain reaction on the market: withdrawals panic, bank-run
    • A run on deposits left the company owing customers $8 billion
  • liquidity issues threatened the FTX platform
  • failed acquisition deals
    • SBF offering Binance CZ to buy FTX, he refused, as due diligence showed huge financial problems
  • News breaking of the misuse of  customer assets,

These factors have all led to the official bankruptcy filings of FTX, and its CEO’s resignation. (

On November 11, 2022, FTX, filed for chapter 11 bankruptcy, while CEO Sam Bankman-Fried resigns and net worth is practically nothing (winepressnews)

New CEO is appointed – John J. Ray III (Twitter)

Revelations & stunning discoveries

As the situation evolved, many mind-blowing facts have became apparent:

  • Alameda Research:
    • Alameda and FTX are not separate entities
    • Alameda received “free money” from FTX
    • At Alameda – there were embarrassingly incompetent people
  • Illegal activity
    • misappropriation of funds:
      • using user’s funds (contrary to the published ToC) for own (Alameda) trading purposes
      • now, FTX could owe money to more than a million people and organizations. (NYT)
    • stealing:
      • A lot of money missing
      • Backdoor in the FTX backend, while withdrawals have been frozen (allowing to withdraw only from Bahamas), potentially for owners and insiders, without triggering system red flags
  • Corporate/Financial Mismanagement
    • Using own token as collateral
      • Own issued token (FTT) was used as the collateral for taking fiat loans
    • insolvency (50% of funds – own FTT token)
    • Risky bets in trading
    • High leverage
    • Giving out huge personal loans to C-level ($1b to SBF)
    • Accounting / assets tracking is really messy
      • nobody knows where those assets are at this point
    • New FTX CEO is the lawyer who conducted Enron bankruptcy
      • complete failure of corporate controls”
      • approving expenses with personalized emojis
      • using disappearing messages in internal communication
  • Due diligence was most likely skipped by both large investors and celebrities (which did create an illusion the business is legit)
    • “it’s the same negligence and lack of due diligence that celebrities endorsed companies like this” (Joe Rogan’s Experience podcast)
  • Unethical activity
    • Lack of transparency in communication (especially during bank-run)
    • publishing & deleting deceptive/false tweets
    • lies & deceptions:
      • Calling himself altruistic, “the most generous billionaire”, while stealing big chunks of money, and keeping some for himself, and trying to buy political protection with donations
      • “All is OK with funds”, while in reality a huge crisis and freezing withdrawals
      • Calling himself a crypto savior, while having zero interest in free crypto:
        • published a draft regulating crypto/DeFi – probably to get more control and make more money?

In hindsight: Pink & Red Flags

Pink & Red Flags that were ignored – suspicious facts (prior to the events)

Pink flags

  • FTX
    • ties of FTX and Alameda Research (own hedge fund / market maker)
      • who had the opportunity to inflate the FTT token’s valuation
      • “Alameda is printing cash”
      • “it seems like a conflict of interest to own an exchange in a market maker”
    • Aggressive marketing, reckless spending on promotion/donations
      • Sponsored & changed the name of Miami arena into FTX Arena
    • Aggressive investments raising: “invest now at a great discount, or pay more if you decide later”
      • “go f*** yourself”: in response to investor who provided list of offers to initialize partnershipBankman-Fried pitched Palihapitiya’s firm Social Capital last year, the venture capitalist explained. Upon performing due diligence, the VC firm contacted FTX to share its suggestions in a two-page deck. Putting together a board was its first recommendation out of three.“The person that worked [at FTX] called us back and literally—I’m not kidding you—said, ‘Go f**k yourself,’” Palihapitiya recounted.
    • Legal
      • Bahamas (tax heaven blacklist = don’t comply with intl tax standards)+ outside of US legislation) + having “some” regulation (DARE act) – gives some ground for regulations, but not enforcing them
    • Operational mistakes
      • (which were apparent before the events?)
  • SBF
    • SBF’s relationships
      • political influence: via parents & donations to Biden (democrats)
      • frenemy / rival: CZ Binance
    • SBF’s personal traits
      • Loud narcissist, self-praising attributions
        • “The savior of crypto”
        • “The most generous billionaire”
        • “Altruistic….”
      • reckless lifestyle
        • polyamorous relations with 10 people, living in one place
        • playing League of Legends during investors call on Zoom
      • poor social skills & tyranny with employees
      • non-business dress code
      • nervousness on public
        • (knee shaking)
        • vibrating in chair
      • Probably thought he was much smarter than he actually was by 30 y.o.
    • experience
      • SBF is a freshman, and never faced a bear market before
    • SBF’s Initial capital
      • made with an arbitrage opportunity (which is hardly a kind of meaningful economic activity)

Red flags

  • Co-CEO stepped down 3 months prior to the disaster
  • Financial ignorance
    • Offering Elon musk 3 billion for Twitter.
      • Elon Musk: “he set off my bullshit meter”.
      • Does he have 3billion liquid?
  • Market manipulation & attacks:
    • “Wash trading” own tokens – (ibtimes), i.e. initial inflating/pumping of token valuation through own hedge fund Alameda Research,
      • SBF also engaged in creating own tokens for the purpose of wash trading. These include MAPS, FTT, and SRM. Wash trading of these tokens would then create an illusion of market activity, further ballooning FTX valuation through them to its top — $32 billion.
    • SBF published draft to lobby regulation of DeFi platforms (in a greedy selfish interest, attempt to get even more market share and make money?)
    • attacks on Binance

Aftermath & future considerations

The collapse of FTX, one of the world’s largest cryptocurrency companies, had sent long-term shock waves through the crypto world.

There are still some open questions and considerations to keep in mind, that would definitely shape the future of crypto:

  • FTX’s legal action
    • who is responsible for holding FTX accountable: Bahamas? US + SEC?
    • SBF’s fate: any legal action against him?
    • complicated FTX’s bankruptcy due to location in Bahamas
  • Investors & market
    • Investors and traders have lost billions of dollars due to the events, most likely without chance to return anything.
      • If there are some funds to be returned: who gets them first and in which proportion?
    • even deeper total crypto market cap drop
  • Regulations
    • potentially stricter regulations for crypto from governments
    • Biden: call for game-changing crypto rules (Nov 20, 2022)
  • CEX’s
    • CEX’s facing massive withdrawals
    • regaining customers’ trust: coping with extended caution towards all CEX’s (centralized exchanges) with customers’ funds in custody
      • Proof of Reserves – binance. When we say Proof of Reserves, we are specifically referring to those assets that we hold in custody for users. This means that we are showing evidence and proof that Binance has funds that cover all of our users assets 1:1, as well as some reserves.When a user deposits one Bitcoin, Binance’s reserves increase by at least one Bitcoin to ensure client funds are fully backed
  • DeFi
    • self-custody: shift towards self-custody away from CEX’s
    • potentially new wave of growth in DeFi platforms, despite higher fees
  • Bahamas
    • harm/damage to Bahamas’ reputation as a crypto hub

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