FTX: The Biggest Disaster in Crypto History Explained

The crypto industry might be going through its own version of a 2008 financial crisis right now.

While cryptocurrency users are guessing at how to recover their portfolios amid the ongoing bloodbath, scammers are aggressively attempting to jump on the hype train of the hottest topic in the market right now. The FTX and Binance drama.
FTX is one of the largest cryptocurrency exchanging platforms in the world, along with the much larger Binance.
FTX was valued at $23 billion at the beginning of this year. And has been heavily promoted by many “trustworthy” influencers and even Tom Brady.
But on the 11th of November, FTX announced that it will file for bankruptcy, with its CEO, Sam Bankman-Fried, stepping down in the wake of a trading scandal that has embroiled the firm in regulatory inquiries.
Rumors even spread that the disgraced ex-CEO had fled to South America.
It was the biggest collapse in the crypto industry.
This sudden collapse is being referred to as the crypto industry’s “Lehman Brothers” moment — a reference to the once-mighty investment bank whose implosion helped spark the 2008 financial crisis. And it’s not showing any signs of slowing down.
But to understand how this devastating downfall of one of the crypto world’s giants happened, we need to take a step back.
You see, FTX was more than a crypto exchange platform, it was a darling of Wall Street, with major financial companies, sports leagues and franchises who entered multimillion-dollar contracts with the company. Those included a $135 million deal to rename the Miami Heat’s stadium the FTX Arena and an ad with NFL star Tom Brady.
This election cycle, The 30 years old CEO was the second-largest Democratic donor and a major lobbying force in Washington for crypto regulation. Before this turmoil, Sam drew comparisons to J.P. Morgan for bailing out other troubled exchanges.
Sam learned to trade stocks during a short stint at trading firm Jane Street in New York before he got bored and decided to experiment with Bitcoin.
He noticed the variations in the value of Bitcoin across different cryptocurrency exchanges and started arbitraging – buying Bitcoin from places selling it cheap and selling to other places where it was trading for more. After a month of making modest profits, he got together with some college friends and started a trading business called Alameda Research. A company that will play a big role in the catastrophe.
By January 2018, his team was making $1m every day and he became an official billionaire by 2021, thanks to his secondary and more high-profile business, FTX. The crypto exchange grew to be the second largest in the world and a titan of the industry, seeing $10-$15 billion traded a day.
On the other side, we’ve got Changpeng Zhao, the CEO of Binance, the world’s largest crypto exchange and FTX’s main rival. The pair were once close, and Binance made an early investment in FTX.
But tensions emerged between the two as Sam lobbied Washington for more regulation and Zhao publicly objected to those efforts.
Zhao made his opinion clear in a tweet he made earlier in November, stating “We won’t pretend to make love after divorce. We won’t support people who lobby against other industry players behind their backs.”
A report was published later on citing a private document that raised questions about whether FTX and Alameda Research were more interconnected than previously disclosed. Alameda reportedly had a large portion of its balance sheet tied up in an FTX-issued cryptocurrency called FTT, raising questions about whether the two companies could survive a major drop in FTT’s value.
Zhao, who held a large stake in FTT, announced that Binance would sell about $530 million of FTT — depleting the value of the token and prompting FTX customers to start pulling out their investments. And despite Sam’s efforts to calm customers they withdrew some $654 million from FTX, in which point Zhao announced that he was swooping in to buy out the troubled exchange before eventually pulling out of the deal.
A day later, FTX was declared bankrupt.