The catastrophic meltdown of crypto titans FTX and Alameda Research has rocked the cryptocurrency world over the past fortnight. The rumour that the pair had blurred the lines between user deposits and their investments soon became a cascade of events that sent shockwaves through the industry. Bitcoin and other cryptocurrencies have been sent into a downward spiral following the implosion, earning November 2022 a place in the history books as one of the worst months in crypto’s history.
But, what really caused the downfall of FTX, what has the impact been and why is Bitcoin falling?
The final quarter of 2021 proved to be the beginning of what has turned out to be a savage downtrend for Bitcoin and crypto markets ever since. Despite reaching an eye-watering US$69,000 almost precisely one year ago, Bitcoin sits nearly 75% down from its record high. The entire cryptocurrency market peaked at a total value of $US3 trillion at around the same time in November of last year but has shed almost $US2.2 billion in value over the past year.
2022 has proven to be a challenging year for investors globally, with both Russia’s invasion of Ukraine and massive fiscal stimulus by governments during Covid-19 lockdowns, causing high inflation for countries worldwide. To drive down the inflation rate to acceptable levels, central banks have raised interest rates, negatively impacting investment markets, such as stocks and crypto.
Since the start of the year, cryptocurrencies across the board have generally trended downward in value, exposing vulnerabilities for some players in the industry. The Terra Luna collapse in May caused significant fallout for the entire crypto space, wiping out almost $US60 billion from the crypto markets in a matter of days. Numerous companies were directly affected; most notably, Celsius, Voyager and 3 Arrows Capital filed for bankruptcy following the incident.
By October, the crypto markets had finally begun to shake the dust off from the Terra collapse, and the space seemed to be moving in a positive direction. However, on November 2nd 2022, CoinDesk ended the brief moment of tranquillity by revealing that giants FTX and Alameda Research appeared to have put themselves in a risky position. A cascade of events soon followed, creating mass hysteria in the world of crypto and tanking the price of Bitcoin as investors panic-sold their assets to rescue any money they had left.
A Bit of Background: FTX Implosion Explained
Sam Bankman-Fried, more commonly known as SBF, is a crypto mogul known for founding exchange giant FTX and quantitative trading firm, Alameda Research. CoinDesk revealed that while Alameda Research and FTX were supposedly separate companies, the balance sheets of these companies had become intertwined. The holdings of Alameda Research were dominated by FTX’s token, denoted by the ticker symbol FTT.
Several days after this information surfaced, a rival exchange and investor in FTX, Binance, announced they would sell all remaining FTT holdings, amounting to $US580 million. Naturally, the price of the FTT token plummeted following the news. This price drop caused immediate panic among FTX users, and a ‘bank run’ on the exchange ensued. After only $US4.5 billion in crypto assets had been removed from the FTX platform, withdrawals stopped being processed without warning.
This situation left $US10 billion of user funds trapped on the exchange, potentially affecting millions of users. Fearing the worst, some affected crypto investors began selling whatever assets they had remaining to get out of the market, causing a rapid fall in Bitcoin and cryptocurrencies across the board. Rival exchange Binance briefly stepped in, offering to buy out FTX and fulfil their liabilities; however, after less than a day of due diligence, they announced the issues were beyond their “ability to help”.
After this, Chinese crypto-mogul and founder of TRON, Justin Sun, offered to back any FTX deposits of TRON-based tokens. Seeing a way out, users instantly flocked to buy the Sun-backed tokens and withdraw, pushing the price up on the platform by almost 50 times the original. Of course, when withdrawn, this meant taking an immediate loss of up to 99%. Many FTX users decided that taking this loss was better than leaving assets on the exchange.
FTX has since filed for bankruptcy, both in Australia and overseas, suffered an alleged hack for almost $US1 billion in user funds, and is now being investigated by the Bahamian Government for criminal misconduct. Quite the downfall indeed.
Impacts Of The FTX Meltdown
The collapse of SBF’s empire has widespread consequences for the crypto industry. FTX and Alameda Research were seen as industry powerhouses and had investments or liabilities with many companies in the space. Other companies affected by the FTX collapse have already started coming forward, pausing user withdrawals from the platform while they determine the extent of the damage.
Aside from the direct impact of FTX’s dealings with other companies, there has also been a degree of mass hysteria and panic. Some crypto investors have all but lost faith in centralised platforms and exchanges, and are frantically withdrawing every penny they can from their accounts. Massive outflows from exchanges show the extent of this loss of trust, with over $US3.7 billion worth of Bitcoin being removed from exchanges, along with billions of dollars in other currencies.
Some users may have been so shaken by the disaster that they may decide to sell their assets and leave the crypto space entirely. The plunge in prices across many crypto assets suggests this could be a distinct possibility and could be one of the reasons why Bitcoin is falling. However, despite the negative impacts of the past week, there are some positive takeaways.
A key takeaway will be the need for improved regulation for centralised crypto exchanges to ensure the proper management of users’ funds. SBF was presenting the case to regulators that proposed a light touch, benefitting FTX and most severely affecting rivals and decentralised financial applications.
Another critical realisation for crypto investors is that centralised platforms are not necessarily the safest places to store crypto: those who chose to keep their crypto assets in their wallets were unaffected by the past week’s events and still have access to their cryptocurrencies. Some may be so scarred by FTX’s collapse that they opt for this storage method in the future. In any case, watch this space.
This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class.