Understanding the FTX Scandal That Threatens Bitcoin, Crypto | Arena

The crypto industry has been shaken by an unprecedented crisis, which has struck down one of the most influential players.

FTX. 

Difficult to ignore these three letters in the last few days. You are probably living on another planet if you haven’t seen or heard them in the news. 

A little catch-up: These letters are the name of a big player in the cryptocurrency industry, a player which imploded overnight.


Until its implosion on November 8, FTX, an exchange where you could buy and sell cryptocurrencies like bitcoin, was considered one of the most financially sound companies in the world.

In February, FTX was worth $32 billion. Its CEO and co-founder Sam Bankman-Fried, 30, was one of the richest men in the world with a fortune valued at $15.6 billion. It is now wiped out.

The company filed for Chapter 11 bankruptcy on November 11. It’s hard to know if its customers will ever get their money back.

What happened?

As a crypto exchange, FTX executed orders for their clients, taking their cash and buying crypto currencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.

FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.

At the same time, FTX was using the crypto currency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT. 

Once this exposure came to light, clients, fearing an FTX collapse, rushed to liquidate their crypto positions and get their money back. On November 6, customers withdrew a record $5 billion, Bankman-Fried reported on November 10. It was a run on the exchange. This led to the insolvency of FTX, since it did not have the crypto assets, now on loan or sold, to honor its clients’ sell orders. 

Why does the FTX collapse threaten the whole industry?

FTX is a big player. Last summer, when many crypto firms faced liquidity crises, it was Bankman-Fried who emerged as a savior. He lent money to many of them, to save them from bankruptcy.

The list includes the who’s who of the crypto sphere: Robinhood, BlockFi and Voyager Digital, to name a few.

The former billionaire was also a shareholder in many firms.

His influence also extended into sports where NFL star Tom Brady and NBA star Stephen Curry were shareholders of FTX.

Many large investors had also invested in FTX: BlackRock, Sequoia Capital, Softbank,Tiger Global, Insight Partners and Paradigm.

The fall of FTX will impact many businesses beyond the crypto industry.