FTX Trading Meltdown: What You Need to Know

One of the world’s leading cryptocurrency exchanges crashed and burned in spectacular fashion this week FTX Trading Chapter 11 . filed for bankruptcy protection.

Until recently, FTX was the darling of the crypto world – a startup founded by two graduates from the Massachusetts Institute of Technology set their sights on creating a company that would let users buy and sell bitcoin and other digital currencies. Is. But after a meteoric three-year growth that turned one of its founders and former CEO Sam Bankman-Fried into a multi-billionaire, FTX suddenly unraveled.

The collapse is rocking the fledgling crypto industry and digital currencies themselves, which have long raised questions about their value and safety as investments. What’s going on over here.

What is FTX?

FTX Trading is a Bahamas-based company that runs the cryptocurrency exchange FTX. Sam Bankman-Fried and Gary Wang founded the company in 2019 making it into the third largest crypto platform by trading volume. According to Pitchbook, in its early stages, FTX raised nearly $2 billion in venture capital from a range of investors, including Sequoia Capital, wealth management giant BlackRock and even blue-collars such as the Ontario Teachers Pension Plan. Chip venture capital firm is also involved. ,

Investors use FTX to buy, store and trade hundreds of different cryptocurrencies, including Bitcoin, Ether, Solana, Litecoin, Ripple and Dogecoin. According to CoinMarketCap, around $840 million worth of crypto assets are exchanged daily on its platform.

FTX has raised its profile in recent years with spectacular Super Bowl commercials featuring quarterback Tom Brady and comedian Larry David. Its celebrity shareholders list includes NBA player Stephen Curry, Brady’s ex-wife Gisele BundchenTennis star Naomi Osaka and Shark Tank’s Kevin O’Leary.

What is the reason for declaring FTX bankrupt?

FTX had annual revenue of $1 billion by the end of 2021, but it faltered this year amid a sharp drop in cryptocurrency prices. In a matter of weeks, FTX found itself in billions of dollars in debt after a series of miscalculations and investments that didn’t pan out.

Banksman-Fried said Tweet This week They mistakenly assumed that the company had enough cash to pay for 24 times the amount of money users could withdraw in a day; In fact, FTX only has enough cash to pay out 0.8 times the amount — a dangerously thin capital cushion.

Miscalculations proved disastrous last weekend when FTX experienced a bank run version of crypto. Users withdrew nearly $5 billion in a single day amid growing concerns about FTX’s solvency. A few days later, Banksman-Fried told investors that the company needs to have about $8 billion available if customers want you to liquidate their remaining crypto holdings.

“I’m really sorry, again, that we ended up here,” Bankman-Fried tweeted on Friday.

FTX is exploring ways to make up for that $8 billion shortfall, but Friday’s bankruptcy filing shows no white knights turned up. The crypto world initially thought Binance would save the day, but its CEO Changpeng Zhao walked away from the deal this week, citing FTX’s liquidity problems.

FTX now says that declaring bankruptcy will allow the company to “assess its situation and develop a process for stakeholders to maximize recovery.” However, given FTX’s financial constraints, it is unclear how much money investors who have lost funds will be able to recover.

Why are regulators investigating?

The Associated Press reports that both the Securities and Exchange Commission and the Department of Justice are investigating FTX for potential breaches. Regulators are trying to determine whether employees of FTX’s trading arm, called Alameda Research, used client funds to conduct risky trades.

Such risks are rampant in the crypto industry, which remains unregulated in the US and in many markets around the world. Highlighting its alarming situation, FTX posted this dire warning on its website on Thursday.”

“Trading on FTX US may be paused for a few days. Please close any positions you wish to close.”

Securities regulators in Australia, Japan and the Bahamas have also launched inquiries into FTX. The Securities Commission of the Bahamas, where FTX is based, froze the company’s assets on Thursday and hired a firm to liquidate its holdings there.

“The Commission is aware of public statements suggesting that clients’ assets were mismanaged, mismanaged or transferred to Alameda Research,” the agency said in a statement on Thursday. “Based on the Commission’s information, any such action would have been without the customer’s consent and potentially illegal, contrary to the general rule.”

Who is Sam Banksman-Fried?

Bankman-Fried is one of the two founders of FTX and was its chief executive and public face until his resignation on Friday. The son of two Stanford University law professors, he graduated from MIT with a physics degree and later moved to Hong Kong to start Alameda.

Bankman-Fried then moved to the Bahamas, where he founded FTX in 2019, just as the cryptocurrency was beginning to gain mainstream attention among average investors. According to Forbes, after buying a series of tokens a few years ago while crypto prices were still low, Bankman-Fried finally saw his personal wealth balloon to $26.5 billion, according to Forbes.

Widely known as a vegetarian who loves to play League of Legends video games, Bankman-Fried also gained a reputation for bailing out struggling crypto companies, earning him the nickname of “crypto savior”.

FTX’s bankruptcy filing may halt Banksman-Fried’s penchant for philanthropy — at least for now. According to BNN, his 70% ownership of FTX’s US operations and his equity in Robinhood Markets, which were tied up in Alameda, have fallen in value to $0. Bloomberg.

what happens next?

The filing shows Chapter 11 that FTX plans to reorganize under court supervision and eventually exit bankruptcy. Until then, FTX employees will remain at the company and help the new CEO navigate bankruptcy proceedings, a . According to Statement,

FTX’s creditors will appear in bankruptcy court to recover some of their money. A bankruptcy judge and trustee will decide which assets of FTX can be liquidated and then divide the proceeds.

The FTX bankruptcy could also add momentum to Washington for lawmakers to pass cryptocurrency regulations. Rumors about it have already begun with Congressman Maxine Waters, D-California, calling for oversight and SEC Chair Gary Gensler telling CNBC on Thursday that he thinks investors should be better financially in the crypto space. Security is required.

“The recent decline of – a leading international cryptocurrency trading platform – is the latest example in a series of collapses of cryptocurrency companies and the impact these failures have had on consumers and investors,” Waters said in a statement. Week.

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