The Crypto Market Shake-up of 2022: Unpacking the FTX Fiasco

The whole crypto market has shaken to the core once again. FTT is down 75% in the past 24h, Bitcoin is testing the new support at $17,000, and the Crypto Market Cap dropped to $860B. What caused such carnage? And what’s gonna happen now? This article will explore the recent events, the implications, and what's next. 

It All Started Years Ago...

On December 20, 2019, BinanceLabs became an early investor & partner in FTX. As a part of the investment deal, Binance had taken a long-term position in the FTX Token (FTT). 

In the beginning, it seemed like a hell of a deal! During the crypto craze in 2020-2021: FTX grew revenue by 1 000% (to $1.2B), became the second largest CEX, acquired 15 other companies, and SBF became the famous "Fro of Crypto" & visionary genius.

FTT Token in The Center of Interests

FTT is a native token of FTX exchange. It was created as a utility token that is used within the exchange ecosystem for paying fees, distributing rewards, etc. 69% of the token was distributed to investors and 31% remaining left to the platform/founders. 

However, as it’s natural for utility tokens, FTT is highly centralized and generally highly illiquid. In fact, 93% of FTT is held by just 10 addresses, with the top owners being FTX, Alameda Research (Another company of SBF), and Binance. 

7/ Not only that @AlamedaResearch and @FTX_Official are the biggest holders of FTT (their own token) but they’re also heavily using it as collateral for loans. Reportedly, Alameda obtained $2.2 billion worth of loans this way. 🤕https://t.co/V6yDQuD9rh

— CoinBrain (💰, 🧠) (@CoinBraincom) November 9, 2022

Not only that Alameda and FTX are the biggest holders of FTT (their own token) but they’re also heavily using it as collateral for loans. Reportedly, Alameda obtained $2.2 billion worth of loans this way.

FUD & Panic Start Spreading

On November 2, 2022, CoinDesk published an article about Alameda’s Balance Sheet suggesting that most of their cash is held in highly illiquid FTT and other shitcoins. Shortly after, Binance CEO, CZ, shared the article about the balance sheet with his 7M Twitter followers which started the first wave of FUD. 

On November 7, 2022, Larry Cermak dropped his personal list of Alameda’s addresses and the FUD started getting serious. FTT started flooding markets and this sell-off caused a huge panic which led to more sales and more panic. Alameda’s bluffs about buying everything for $22 and having $10B of assets that weren’t reflected in the balance sheet, didn’t help. 

FTX saw huge withdrawals. So huge, that at a certain point, they even stopped processing withdrawals onchain. 

Binance Acquisition 

On November 8, 2022, CZ announced that he’s intending to fully acquire FTX.com and help cover the liquidity crunch. The deal was non-binding, so Binance could take a look under the hood and then decide if they want to proceed with the transaction. The whole deal was only about FTX.com – not FTX US or Alameda research which is still in the deep trouble. 

This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.

— CZ 🔶 Binance (@cz_binance) November 8, 2022

Shortly after, Binance announced that it has decided not to pursue a purchase of the crypto derivatives exchange FTX. This news came as a surprise to many in the crypto industry, as Binance had previously been in talks to acquire the platform.

As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.

— Binance (@binance) November 9, 2022

Bankruptcy

On Nov. 11, FTX announced that it had filed for voluntary Chapter 11 bankruptcy proceedings for FTX, FTX.US and Alameda. 

1) Hi all:

Today, I filed FTX, FTX US, and Alameda for voluntary Chapter 11 proceedings in the US.

— SBF (@SBF_FTX) November 11, 2022

Immediately after that, FTX and FTX.US experienced a major security breach with hackers draining more than $600 million from their wallets. FTX posted a warning on Telegram, saying their apps were malware and notifying users to not go on their site as it may download Trojans. 

A Twitter user also reported hackers attempting to access bank accounts linked to FTX.US, which led Plaid to shut off FTX's access to their products. These events demonstrate the importance of taking appropriate security measures when investing in cryptocurrency.

Aftermath

The troubles of FTX have had a significant impact on the U.S. crypto market. 

• Bitcoin's price dropped below $16,000 on two separate occasions, and over $3.2 billion of Bitcoin was taken off exchanges in the week of Nov. 8-15. 
• Ethereum's price also dropped below $1,100 on Nov. 9.
• Solana dipped below $13 due to CoinDesk's report of Alameda's large holdings of the cryptocurrency. 
• On Nov. 10, Tether briefly depegged from the U.S. dollar by 3%. 

These events demonstrate the inherent risk of investing in cryptocurrency. As such, it is important for investors to remember to keep high-risk investments such as cryptocurrency to a minimum and to diversify their portfolio of cryptocurrencies to minimize these risks.

The former CEO of FTX, SBF, has been subject to harsh criticism and numerous lawsuits. A class-action lawsuit filed against FTX and some of the celebrities who endorsed the platform alleges that U.S.-based customers suffered $11 billion in damages. 

SBF had been scheduled to testify in front of Congress on December 13th, but was arrested in the Bahamas on Monday evening and his testimony was cancelled. The Justice Department and the Securities and Exchange Commission have also been looking into the situation with FTX. 

Many analysts believe that further regulation will be coming to the crypto space.

Impact on Crypto Industry

The collapse of FTX, once a $32 billion crypto exchange, has caused a shockwave throughout the industry, with investors trying to gauge the extent of the damage. 

Sam Bankman-Fried, FTX’s former boss, was arrested in the Bahamas last week and charged with wire fraud, securities fraud, and money laundering. FTX allegedly dipped into client accounts to make risky trades through its sister firm Alameda Research. 

The lack of regulation in the crypto industry left investors without protection. The FTX saga could cause governments in the U.S., European Union, and the U.K. to take steps to clean up the market, such as the EU’s Markets in Crypto-Assets regulatory framework. 

Consolidation is expected, with many new crypto companies and projects likely to go under as a result of the FTX saga. Binance, the world’s largest exchange, is facing questions about reserves it holds to backstop customer funds. 

Despite the current depressed state of crypto markets, proponents of 'Web3' are optimistic that the crypto winter of 2022 will pave the way for more innovative uses of blockchain, such as nonfungible tokens (NFTs). These digital assets track ownership of unique virtual items on the blockchain.

Conclusion

In conclusion, the FTX fiasco has had a tremendous impact on the crypto industry, with many crypto companies and projects likely to fall by the wayside. 

Despite the current market downturn, proponents of the Web3 movement are still optimistic that the crypto winter of 2022 will lead to more innovative uses of blockchain and the widespread adoption of cryptocurrency. As the crypto industry moves into a new era, regulation will be key to providing investors with protection and preventing similar events from occurring in the future.

Only time will tell how the crypto industry has handled the situation and if it has learned from its missteps. We are optimistic about its future, yet there is still a lot of work that needs to be done before crypto can dominate the global market.