The fallout of one of the largest cryptocurrency exchanges already seems to have ripple effects, diminishing already-dampened confidence among crypto investors. Since the beginning of 2022, crypto prices have been trapped in a downward spiral and as valuations tumbled from their all-time highs, companies that are operating in the field faced rising pressure.
FTX is an example of what can happen to a company that’s less transparent and doesn’t attempt to comply with tight regulations. Investigations are already being carried out, but it’s going to take some time to reach conclusions. Let’s take a look at how this whole fiasco started.
On November 2nd, 2022, CoinDesk published an article talking about how Alameda Research, a sister company of FTX, had a balance sheet full of FTT, the token issued by the exchange. Four days later, Changpeng Zhao, CEO of Binance, announced that his exchange will offload all holdings of FTT, further exacerbating the drop in prices. According to analysts at Invest Ecapitals, this was the point when the broad crypto market reacted to the scandal impulsively.
Another twist occurred on November 8th, when Binance agreed to buy FTX, only to pull off the deal a day later, claiming FTX has several balance sheet issues. On November 11th, FTX filed for bankruptcy, and Sam Bankman-Fried, aged 30, resigned as CEO of the company.
In a matter of days, not weeks, the third-largest crypto exchange in the world went to zero, suggesting that the industry still has a lot to grow until users can benefit from financial protection.
FTX filed for bankruptcy
The Wall Street Journal also reported that FTX lent billions of USD to Alameda by using customer funds, basically funding risky bets. Headquartered in the Bahamas, the exchange operated without any major regulatory oversight, and this is obviously a recipe for disaster (sooner or later).
By filing for bankruptcy, the company aimed to gain protection against customers who had demanded their funds back. This is again solid proof of the risks involved with traditional exchanges. Trading crypto derivatives with brands like Invest Ecapitals does not expose users to underlying instruments, so they are not vulnerable in case a coin goes bust.
Bankman-Fried, alongside several celebrities who have endorsed FTX, now faces a class action lawsuit from US crypto investors. Filed earlier this week in Miami, the lawsuit accuses the exchange of false representation and deceptive conduct.
Broad crypto market impacted
The spillover resulting from the bankruptcy impacted the entire cryptocurrency space. Bitcoin and altcoin prices dropped to new lows for the year, in anticipation of liquidations. Although the market has managed to stabilize at lower levels, crypto investors are still not out of the woods, since news related to FTX can lead to renewed downside pressure.
On top of the damage caused to valuations, large crypto names going bankrupt is, inevitably, a massive hit to overall confidence in this sector. Long-term buyers might have to wait sometime until prices rise sustainably once again. This whole FTX scandal might trigger a strong response from regulators, who want to impose strict laws protecting investor funds.
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