The downfall of FTX was as meteoric as its rise, wreaking havoc across the cryptocurrency industry. The fallout was huge: reputations were shattered, billions of dollars of customer funds were lost, loans disintegrated, creditors blew up.
Nevertheless, in the years leading up to the collapse, many sophisticated investors gave money—a lot of it—to the exchange’s now-disgraced CEO, Sam Bankman-Fried. Below we chronicle the path that led the crypto industry to the edge of a cliff.
Sam Bankman-Fried and His Companies
Sam Bankman-Fried began trading cryptocurrency at scale during his employment at the secretive hedge fund Jane Street Capital in 2013. While there, he would buy cryptocurrency in the US and sell it in Japan at higher prices, a practice known as arbitrage. In 2017, Bankman-Fried opened his own firm to capitalize on this opportunity, calling it Alameda Research and inviting some colleagues from Jane Street to join him.
Alameda Research was a “quantitative trading” firm, supposedly involved in high-frequency trades with thin margins. Alameda offered investors a guaranteed 15% interest on all loans they made to the company, using the funds to facilitate the overseas arbitrage it was involved in. In 2019, with increasing competition in arbitrage leading to lower returns, Bankman-Fried decided to launch his own exchange, on which Alameda could play as market maker.
He named it FTX, a shorthand for “futures exchange.”
FTX was a cryptocurrency exchange offering derivatives of crypto assets—and sometimes traditional ones. The exchange facilitated trades for crypto options, futures, and even tokenized versions of traditional stocks. With the birth of FTX also came a new token, $FTT, which offered incentives to users of the platform, including lower fees. This token catalyzed FTX’s success but, as we will see, was also the root cause of its collapse.
For a while, the exchange appeared to soar. In 2020, at the height of the COVID-19 pandemic and ensuing crypto frenzy, FTX became well-known for its highly lucrative—and dangerous—margin trading options, which allowed users to trade with borrowed funds.
Bankman-Fried himself became a kind of crypto celebrity, self-styling as “SBF.” He drew at least $1.8 billion from investors, including from mainstream titans like SoftBank and Sequoia. He cavorted with celebrities, including football star Tom Brady and former Trump spokesperson Anthony Scaramucci. He funded politicians (on both sides of the aisle), espoused a benevolent “effective altruism” philosophy that involved giving away all of one’s money, and wooed regulators and mainstream journalists, successfully portraying himself as a sensible alternative to the archetypal anarcho-libertarian crypto bro. He splashed FTX’s name on the Miami Heats’ home stadium and bought a Super Bowl ad featuring Larry David. At its height, Bankman-Fried’s net worth was, by some estimates, $26 billion.
Though Bankman-Fried made no secret about Alameda trading on FTX, it wasn’t publicly known how deep the two firms’ relationship went. Alameda frequently handled FTX’s customer funds. Its CEO, Caroline Ellison, had been in a relationship with Bankman-Fried. In some instances, traders would deposit money onto the exchange by wiring money to a bank account under Alameda’s name.
When the crypto markets collapsed in May 2022, Alameda sustained heavy losses and allegedly began to “ borrow” user funds from FTX to cover up its financial holes. As collateral for these loans, Alameda left only $FTT, the token created by FTX.
At the same time, Bankman-Fried was building a reputation for himself as a heroic lender-of-last-resort, stepping in to bail out failing companies like BlockFi and Voyager. He didn’t mention, however, that he had previously taken out loans from those very lenders, which he was also heavily invested in.
As CEO of FTX, Bankman-Fried also allegedly exempted Alameda from one of FTX’s most prominent and important features: an algorithm designed to automatically liquidate endangered positions. Investigators say Alameda was instead allowed to run up a huge trading debt and draw out funds even on a negative balance—and thereby draining money from the exchange.
But all of this would only be uncovered later.
The Events Leading to FTX’s Collapse
One of the key players in the FTX collapse was Changpeng Zhao, the CEO of rival exchange Binance. Zhao had invested an undisclosed amount into the exchange as one of its earliest investors. Bankman-Fried later bought out that investment, leaving Zhao with around $529 million dollars’ worth of the $FTT token—and, as we will see, a lot of leverage. Before the exchange spun off the rails, Bankman-Fried had been speaking negatively about Zhao on Twitter.
On Nov. 2, 2022, crypto news outlet CoinDesk published a leaked Alameda balance sheet that showed that over $3.6 billion of the trading firm’s assets were in the $FTT token. There was another $2.16 billion in collateralized $FTT, meaning those tokens were loaned out elsewhere, and if the price fell below a certain level, the collateralized positions would be at risk of liquidation. The report hinted at FTX’s financial woes.
On Nov. 6, Zhao announced that Binance would be selling its large FTT stake. This exacerbated concerns amid the general public that FTX and Alameda were in a risky position. A bank run ensued with people vying to withdraw their funds from the exchange while they still could. This severely impacted the liquidity the two companies had at their disposal.
The price of $FTT collapsed from $22 to $5 over the next 24 hours, and withdrawals and selling pressure on $FTT escalated. Sam Bankman-Fried posted on Twitter on Nov. 7 that “FTX is fine. Assets are fine.” That thread has since been deleted. Later that day, withdrawals became increasingly restricted, indicating FTX was short on cash, and panic ensued.
Zhao announced on Nov. 8 that Binance had entered a non-binding agreement to purchase FTX. This gave the company the opportunity to look more closely at FTX’s financial records. It only took another day for the deal to be canceled. On Nov. 9, Binance announced that it would not acquire FTX as a result of the due diligence it had performed.
By Nov. 11, FTX had filed for bankruptcy and other crypto companies began going under, including BlockFi, which had been acquired by FTX only months prior. FTX could no longer meet customer deposits, with an estimated $1-2 billion simply having gone “missing.” Reports came out that over the exchange’s three-year lifetime, FTX had illegally supplied Alameda with over $10 billion of customer funds, much of which was used as leverage for even bigger loans.
On the Lam
After filing for bankruptcy, Bankman-Fried resigned as CEO and was replaced by John J. Ray III, the lawyer who oversaw the unwinding of Enron. From his redoubt in the Bahamas, where FTX was headquartered, Bankman-Fried embarked on a media tour, retailing a story that he had simply erred and had been unaware of any malfeasance. The implication was that Caroline Ellison, Alameda’s CEO, had been responsible for the fraud perpetrated by the trading firm.
On Dec. 12, 2022, Bankman-Fried was nevertheless arrested in the Bahamas, and was subsequently extradited to the United States on Dec. 22, having been charged by the Southern District of New York for “wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering.” A bevy of other government agencies also sued Bankman-Fried, and a guilty verdict could send him to prison for the rest of his life. He has, however, pled innocent.
The FTX Aftermath
Bankman-Fried is far from the only casualty of FTX’s collapse. The global cryptocurrency market cap shrank 28% from $1.1 trillion to $859 billion in the week following Nov. 7, 2022. Alameda had invested in 134 companies, as outlined in its bankruptcy filing, and contagion spread through the market. Companies including Voyager and Genesis Earn later went bankrupt, and FTX customers, unable to withdraw their money, had to make difficult liquidations.
The global crypto market cap only climbed back above $1 trillion two months later, on Jan. 15, 2023.
The mainstream perception of cryptocurrency, however, has yet to recover.