The FTX Scandal: Everything You Need to Know About the Crypto Giant’s Collapse
19 December 22
FTX is short for futures exchange, a trading company where futures — financial contracts — as well as other derivatives are traded. What is a futures contract? It is a derivative instrument where the buyer legally obliges to buy an underlying asset at the predetermined date and price specified in the contract, and the seller is obliged to provide the said underlying asset at the date and price determined in the contract.
Despite the company’s name FTX, founded in 2019, it offered a wide range of financial instruments including options, derivatives, leveraged tokens, and volatility products. FTX was one of the largest cryptocurrency exchanges in the world.
It is generally regarded that derivatives are highly volatile and in traditional sense are mainly used as hedging instruments by professional investors.
So, what exactly happened that a company valued at $32 billion filed for bankruptcy in a matter of days losing millions for investors and delivering a massive blow to the crypto industry?
It all started in November 2022, when CoinDesk — a media and research platform — indicated that Alameda Research — the quant trading firm, which is also run by FTX founder Bankman-Fried — had a position worth $5 billion in FTT, which is the native token of FTX. This raised concerns within the crypto world when it comes to FTX leverage and solvency.
Following the CoinDesk report investors started withdrawing their holdings with FTX, which sparked a liquidity disaster within the company. This resulted in bail out talks with Binance on the 8th of November. The potential bail out fell through the very next day.
Just a day later, on November 10th, the Bahamas’ security regulator froze the assets of FTX Digital Markets, a potential bail out source for Bankman-Fried.
On November 11th Bankman-Fried stepped down as the CEO of FTX. The company filed for bankruptcy the very same day.
Here things become a little unclear as hours after FTX filed for bankruptcy the exchange got hacked, which resulted in $500 million in assets being stolen.
Sam Bankman-Fried is currently in a Bahamas’ prison awaiting extradition. The prosecution could push for up to 115 years in prison if he is convicted on fraud charges.