The Global crypto market is in crisis. This comes after the crypto exchange FTX, the former $32 Billion success story, collapsed into bankruptcy on November 11, 2022. This set off a chain reaction in the crypto market that resulted in a plethora of other exchange bankruptcies, with exchange BlockFi filing for bankruptcy on November 28. The lending firm of the crypto investment bank Genesis Global Trading paused new loan originations and redemptions, with partner Gemini pausing withdrawals on their earn program, a partnership with Genesis. So how did this crisis happen? And what does this mean for the average person?

The FTX collapse was a culmination of mismanagement, and believed by many to be a fraudulent attempt to illegally gamble away customer money. At FTX, massive amounts of customer funds were taken and given to a sister “investment company” Alameda Research, who essentially gambled these customer funds away, losing billions of dollars of FTX’s customers money in the process. FTX specifically promised customers in its terms of service that it would not trade, lend, or otherwise use funds that were in their accounts. Despite this promise, a November 12 report by Reuters states that as much as $10 billion in user funds had been sent from FTX to Alameda. Alameda Research spent these funds on a crypto token created by FTX, called FTT token, which was a mostly illiquid asset which the public didn’t have wide access to. This inflated the price of FTT Token, and inflated the value of FTX at the same time, promoting a false image of a high value exchange to the public. Another effect of the investing in FTT was that a large amount of FTX’s crypto was unable to be sold to the public, given that they didn’t have access to it. This meant that the value of FTT, and the value of FTX as a whole, was entirely backed by an asset that couldn’t even be sold. The token that FTX had its customers’ money in was almost entirely worthless in practice, with that fact being exposed by Coindesk in an exposé-style article published on November 2, which exposed Alameda’s sizable FTT position. One of FTX’s biggest rivals was Binance, a crypto exchange which is the world’s largest exchange by trading volume. Binance’s CEO, Changpeng Zhao, tweeted on November 6 that Binance was selling its stockpile of FTT token after the recent report by Coindesk had come to light. This led to a rapid decline in the value of FTT, causing FTX and Alameda losing boatloads of money, and trust from investors. Suspicion grew from investors and customers that FTX didn’t have the liquidity necessary to back transactions on their platform, and people started to rapidly pull their money off of the FTX exchange. In a tweet, former FTX CEO Sam Bankman-Fried announced that FTX saw $5 Billion in withdrawals on the platform on November 6 alone. After days of massive withdrawals and FTX in crisis, Binance CEO Changpeng Zhao signed a non-binding letter of intent for Binance to acquire the non-US branch of FTX on November 8, essentially saving the company. The same day, FTX halted customer withdrawals from the platform, locking billions of dollars of customers’ money within the platform. Sam Bankman-Fried took to Twitter to apologize to the public, attempting to reassure them about the future of FTX. After the development of the locking of customer funds, Binance withdrew from the deal on November 9, citing “mishandled customer funds” and “alleged U.S. agency investigations” as some of the reasoning for their decision. Following this development, Bankman-Fried took to Twitter to address his rival, stating, “Well played; you won.” Without a big company like Binance to back FTX up, and their situation continuing to worsen day by day, FTX and Alameda Research filed for bankruptcy protection on November 11, with Sam Bankman-Fried resigning as CEO. 

After the filing of bankruptcy, the full story of FTX was exposed. On the night of their bankruptcy filing on November 11, an apparent “hack” stole more than $600 million from FTX wallets, Coindesk reported. FTX posted about the hack on its support channel, saying, “FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t go on FTX site as it might download Trojans.” (Trojans are malware disguised as legitimate software). FTX’s balance sheet was exposed on November 14 by The Financial Times, showing $9 Billion in liabilities but only $900 million in assets that could be easily sold. FTX is now under criminal investigation in the Bahamas, where it is headquartered, as well as alleged U.S. Agency investigations. So what does the story of the collapse of FTX mean for US customers?

If you don’t have any money in the crypto market, you probably aren’t personally affected. However, certain companies like BlackRock and SoftBank, companies that you may be invested in in the traditional stock market, had significant losses after investing in FTX. However, if you had any money in FTX or BlockFi, a crypto firm that subsequently went bankrupt while Alameda Research owes it over $600 million, you almost certainly lost your money. On November 19, court filings revealed that FTX owes its top 50 creditors a combined $3.1 billion, with them having over a million individual creditors that they owe money to. But how can FTX get this money? And if they can, will customers even see it? The answer is most likely no. To add to the bad news for former FTX customers, new FTX CEO John Ray stated in the November 19 court filings that a “significant portion” of assets held on FTX were either “missing or stolen”. Users still are not able to withdraw any assets from FTX, and the future looks bleak for them to get their money back.

The FTX bankruptcy fiasco was a key example of how the deregulated crypto market could come back to bite itself, and how corporate immaturity and illegality ultimately leads to the average customer getting hit the hardest.