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What Happened to FTX Crypto Exchange?
FTX, the world's second-largest cryptocurrency exchange, is experiencing a crisis that has led to a further decline in the value of digital assets.
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The second largest cryptocurrency exchange in the world, FTX, is in the midst of a crisis, which has caused the market for digital assets to see yet another drop.
This article looks at what has transpired with FTX, why it has occurred, and what this means for the overall market.
What is FTX?
Although it has its registered headquarters in the Bahamas, FTX is controlled from the United States, with most of its operations being in Chicago and Miami.
A cryptocurrency exchange is a platform that facilitates the buying and selling of digital assets. All cryptocurrencies are based on the same fundamental structure as the cryptocurrency industry's flagship asset, bitcoin. This structure is known as a "blockchain," and it tracks ownership without the involvement of any centralised authority. Along with its chief competitor, Binance, FTX conducts the vast majority of cryptocurrency deals worldwide, which helps explain why it is so large and significant.
FTX and Binance qualify as "international" exchanges, the cryptocurrency world's analogue to an offshore gambling establishment. The majority of the money that passes through their books is, in effect, unrestricted by the imposed regulatory requirements. However, each of them also operates a US-regulated outlet that is independent of them, which strictly adheres to the minimal regulation imposed by the US government.
What happened to FTX this week?
On Wednesday of the previous week, an item that precipitated a crisis was published in CoinDesk, a news site that covers the cryptocurrency business. It was asserted that the balance sheet of Alameda, a cryptocurrency hedge fund owned by FTX's founder Sam Bankman-Fried, held billions of dollars worth of FTX's cryptocurrency, FTT and that it had been utilising it as collateral in further debts. FTX's founder was also named as a defendant in the lawsuit. Given that the same person owns these two companies, a decline in the value of FTT might be detrimental to the success of both of them. However, FTT itself had no value beyond FTX's longstanding commitment to buying any tokens at the price of $22, which sparked worries that the entire institution was a sandcastle built on top of a house of cards.
The slow-burning crisis was kicked into high gear on Sunday when Binance's chief executive, Changpeng Zhao, tweeted that his company was selling its FTT holdings, which were worth approximately $500 million, as a result of "recent revelations that have come to light." The sale of these assets brought the total value of the downturn to about $500 million.
Things quickly got out of hand after that. The value of FTT plummeted, and consumers of FTX began pulling their money out of the exchange in a frenzy reminiscent of a bank run. This week, in a colleague message, Bankman-Fried stated the company suffered a "huge withdrawal spike" as users hurried to withdraw $6 billion (£5.1 billion) in crypto tokens from FTX over three days. Reuters reported that Bankman-Fried referenced the communication. According to what Bankman-Fried told his staff members, the daily withdrawals typically amounted to tens of millions of dollars.
After that, Zhao came to the rescue of FTX by first agreeing on Tuesday to purchase the company but then stating on Wednesday that he was withdrawing from the transaction. FTX was saved because of Zhao's intervention. "The difficulties are beyond our control or ability to help," Binance added, noting discoveries made during due diligence and the beginning of regulatory investigations in the United States. "The issues are beyond our control or ability to help."
What next for FTX?
Either the business will have to come up with billions of dollars to fulfil the withdrawal requests of consumers, or it will have to figure out a means to reassure clients that their funds will be secure to stop the mass exodus. When there are a large number of clients leaving all at once, it is a challenging task. According to a story published by Bloomberg on Thursday, Bankman-Fried stated that the company required $4 billion to be sustainable, with a cash deficit of $8 billion.
There are also more in-depth questions regarding the discussion. Bankman-Fried tweeted that FTX was "good" and that it did not trade in any way with the assets of its customers just one day before the business reached an agreement to sell itself to Binance. But Sequoia Capital, a venture capital firm that invested $150 million in FTX, sent an email to the investors warning them that the company was experiencing a liquidity crunch and solvency concerns. This means that the company owed more money than it had.
The next day, after the deal fell through, a person who identified themselves only as "SBF" returned and apologised for their past mistakes. "I fucked up twice," he decided to write, trying to kick off a series of tweets in which he apologised for poor communications and said he had mistakenly assumed the exchange could not face a liquidity crunch but argued that it was not insolvent. "I fucked up twice," he wrote, kicking off a series of tweets in which he apologised for poor communications and said he had mistakenly assumed the exchange could not face liquidity.
However, Bankman-apologies Fried only went so far, and users still had issues, particularly considering the other claims he was making simultaneously. Users had questions since Bankman-apology Fried's only went so far. According to a report in the Wall Street Journal, FTX had given Alameda a loan of $10 billion of client cash so that they may gamble with the money. This is a sizeable chunk of the exchange's total assets of $16 billion.
Will this affect other cryptocurrencies?
Already, there is one. Since the beginning of the crisis at FTX, the price of bitcoin has dropped from $20,000 per coin to $16,000, its lowest value since 2020. According to CoinMarketCap, the entire sector has dropped roughly 5% in the last 24 hours, and large firms and protocols exposed to FTX are being forced to demonstrate their liquidity. The value of a popular token on the Solana protocol, for example, which enables users of that blockchain to trade bitcoin, is dependent on FTX. If FTX were to fail, it is unknown whether any of the bitcoin stored on the Solana protocol would be retrievable, resulting in the disappearance of millions of dollars in a single night.
The "stablecoin" that supports a significant portion of the cryptocurrency industry's economy is Tether, which has a market cap of approximately $70 billion. On Thursday morning, the token was trading at $0.98 to one dollar, significantly lower than its previous "peg." Paolo Ardoino, who serves as the chief technical officer (CTO) of the business that issues Tether, tweeted to reassure investors, stating that the company has processed approximately $700 million in withdrawals over the course of the previous twenty-four hours. "No issues," he said, "we keep going."
What about wider markets?
The robustness of the monetary system to tremors in the cryptocurrency market has already been tested over the preceding twelve months with the start of a new "crypto winter." The value of the whole cryptocurrency market reached its all-time high of $3 trillion in November of 2017, but it has since plummeted to its current level of approximately $800 billion due to a combination of crypto-specific events and broader macroeconomic difficulties. During that same period, the global financial markets have also experienced losses, but those losses are attributable to much more significant problems, such as the invasion of Ukraine by Russia and rising interest rates.
According to Carol Alexander, a professor of finance at the University of Sussex, the frost will last longer because the most recent wobble dealt additional damage to the industry’s reputation. Because of this, the crypto winter will last for a significantly longer period.
She said the possibility of a contagion from the cryptocurrency industry spreading to standard finance markets was still low. This was because institutional investors, who are always looking to achieve high returns on their investments, were discovering that it was easier to earn money from conventional assets in an environment with high-interest rates. "It's well-known that time-tested investments like bonds are enjoying increased popularity. This indicates that crypto is less of a threat to the system.
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Conclusions
If FTX files for bankruptcy, user payments will remain in limbo. Given the number of well-known organisations that have invested money in the FTX platform, we do not know the exact proportion of user funds that FTX still has in its possession; however, a traditional bankruptcy could have a cataclysmic effect on the industry as a whole in terms of its financial standing.
FAQ
What exactly is going on with the FTX cryptocurrency?
After suffering the cryptocurrency counterpart of a bank run, the cryptocurrency trading company FTX, which is currently in the process of collapsing, is now millions of dollars short. The exchange, which used to be one of the largest in the world, filed for bankruptcy protection the previous week, and its CEO and founder quit.
Why FTX failed?
After an onslaught of consumer transactions earlier in the week, FTX, which is domiciled in the Bahamas, filed for bankruptcy on Friday. The most high-profile failure of a cryptocurrency exchange in recent memory was precipitated when a rescue plan with a competing exchange, Binance, was unsuccessful.
When exactly did FTX go bankrupt?
The precipitous fall of the crypto empire built by 30-year-old Sam Bankman-Fried has spurred a spike in the amount of money leaving cryptocurrency exchanges worldwide. According to data provided by CryptoQuant, users withdrew a net amount equal to $3.7 billion worth of Bitcoin and $2.5 billion worth of Ether during the week beginning on Sunday, November 6 and ending on Sunday, November 13.
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