On November 8, the entire crypto world was shocked by the news of the collapse of the FTX exchange. We already wrote a detailed article about this. Since its release, a lot of dirty details have appeared, a lot of interesting facts have surfaced, and we also had more time to analyze all the events that happened.
Today we will talk about the hacking of the exchange for $600 million, and investigate to answer the question: where did the $8 billion hole come from in the budget and where did the $1 billion of client funds go? Let's provide information about the ties between FTX head Sam Bankman-Fried and the head of the US Securities Commission, analyze what projects will undergo cascaded liquidation and follow FTX and argue that the crypto market is waiting to see further: which sectors will be affected positively, and which will simply be killed.
Recall that on November 8, the cryptocurrency market experienced a severe shock. The native token of the largest FTX exchange collapsed by more than 90%, which entailed a drop in quotes of absolutely all cryptocurrencies.
Why Did People Put Their Money into FTX?
A few months before the collapse, FTX launched a series of very profitable products: a US dollar deposit product with an interest rate of up to 8%, a BTC deposit product with an interest rate of 5%, etc. Because of this, a large number of users deposited tokens, and some users even took loans from banks for a deposit.
The media estimated that in Taiwan between 500,000 and 600,000 people suffered losses as a result of the collapse of the FTX, people even borrowed from banks on the FTX to get 8% per annum.
Also, this situation greatly affected users from Singapore. Singaporean retail investors cannot use Binance, Bybit, and other well-known sites, so they carried their funds to FTX. And this offer — earning 8% in dollars — was hard to resist.
Moreover, the reputation of the FTX exchange was equal, and in some aspects even higher than that of Binance. FTX’s head, Sam Bankman-Fried, was the voice of the cryptocurrency community in the offices of Washington and had great weight in the eyes of the SEC and other US regulators. US Treasury Secretary Janet Yellen claimed that "FTX had great legitimacy in the eyes of users."
How to Lose $8 Billion in One Night
On November 2, Coindesk published an investigation, which immediately began spreading to all crypto media. The investigation affected the FTX exchange and the Alameda Research fund — two companies that are considered friendly because Sam Bankman-Fried owns 50% of FTX and 100% of Alameda Research. Journalists gained access to the internal documents of the second company and found a large number of FTT tokens on Alameda's balance sheet.
FTT is a utility token of the FTX exchange that you can trade and conduct financial transactions.
According to the investigation, as of June 30, Alameda Research had $14.6 billion in assets, of which $3.66 billion were "unlocked FTT tokens," and $2.15 billion were "FTT in collateral" or "collateral tokens." Those are the largest asset of the company and the third largest asset, respectively.
Experts concluded that most of the net capital in Alameda Research's business is its own centrally controlled token. What does it mean? SBF created FTX’s token, raised its price to heaven, and under its security gained loans for his second company. And with the fall of the FTT token, loans, of course, stopped being secured, which caused a liquidity crisis and formed a hole in the budget by more than $8 billion.
As for the personal net worth of SBF, the Bloomberg Billionaire Index valued it at $1.
This whole situation is not one fatal mistake of the CEO of the largest player in the market, it is the systematic adoption of the wrong decisions about the development of FTX and Alameda Research, as well as his greed and penchant for fraud. And all this on such a scale, of course, could not have happened without serious patrons, which we will talk about a little later.
Where did the user funds go? Will someone be able to get any returns?
Spoiler — they will not.
One of the analysts involved in the investigation found that Alameda owed FTX $1.4 billion in BTC, every time someone deposited BTC to the exchange — Alameda borrowed these funds and dumped them into users, so the crypto had a negative correlation and did not bounce off every time there were rallies in macro markets.
Moreover, those in a close circle to Sam Bankman-Fried knew about the use of FTX customers' funds to finance the hole in Alameda, which exacerbates the situation of SBF and its entire team.
Sam's Interview with the New York Times
At first, after what happened, Sam refused to communicate with publications, but at the same time actively tweeted. The main essence of this thread: "Today I filed FTX, FTX US, and Alameda documents for voluntary Chapter 11 proceedings in the United States. I hope there's a way to recover. Ultimately, I'm optimistic. I'm going to clarify the situation as soon as possible in terms of user recovery. "
In an interview with the New York Times, SBF repeatedly expressed regret about what happened and admitted that the events could have developed less dramatically. According to him, the margin position "was significantly larger than he believed," — "billions of dollars."
Sam Bankman-Fried refused to give details of the collapse, discuss the subject of imprisonment and reveal his location, citing security concerns, but agreed that he expanded his business interests too quickly and missed the signs of problems.
The former billionaire also called the criticism of Binance head Changpeng Zhao a "strategically wrong step" in his conversations with regulators.
"Oh, Excuse Me" or 20 Years in Prison? What Threatens the Head of FTX?
The US Justice Department has everything necessary to initiate a criminal case against the now-former FTX CEO Sam Bankman-Fried and other executives of the bankrupt exchange. The Bahamas authorities, the Manhattan County Prosecutor's Office, and many other structures have already begun their investigations.
A lawyer with many years of experience in the crypto industry in a conversation with Fortune referred to a federal law covering electronic fraud. The maximum penalty is up to 20 years in prison.
He added that as evidence of intent, law enforcement officers will be able to use the terms of service of the platform, presentations for investors, and public statements by Bankman-Fried. The crypto jurist has no doubt about the fact that the exchange's business practices and the behavior of its head demonstrated fraud.
Will SBF be able to avoid punishment? He has strong patrons, and rumors about this have long filled the info space, but will they stand up for Sam or prefer to remain in the shadows, given the scale and scandals of the situation?
FTX is Dead. Who's Next?
With FTX and Alameda, everything is clear. No one is betting on the restoration of companies. It is enough only to look at their balance gaps to understand that no investor will give liquidity to their rescue. But after all, Alameda Research was one of the largest venture funds in the blockchain space. What will happen to the projects in which they invested?
Nothing good. The market is waiting for the domino effect. Some projects will receive additional liquidity and will be saved, and some will be forced to simply declare bankruptcy. By the way, to reduce the further cascading negative impact of FTX, Binance is forming an industry recovery fund. They want to help projects that are strong in their fundamentals but are experiencing a liquidity crisis. But the amount of the fund of $100 million is not enough to help all standing startups.
Who Benefited from the Collapse of FTX?
Market maker Cumberland said the collapse of FTX will lead to significant structural changes in the markets and the crypto industry, namely, the rejection of centralization to decentralization. Decentralized exchanges (DEX), like non-custodial wallets, turned out to be the main beneficiaries in this crisis.
In support of his words, the Trust Wallet TWT decentralized wallet token grew 84% over one week. Not without the help of the head of Binance, of course, whose company owns this wallet.
Also, the collapse of FTX played into the hands of their main competitor Binance. The exchange secured the title of the most reliable for users, began to support projects affected by the fall of FTX, and confirmed the assets available in its accounts.
Conclusions. What Awaits the Crypto Market Next?
The $9 billion asset hole left by FTX will affect the crypto market for a long time. Many companies that had a close relationship with FTX are trying to brush their losses under the carpet, but one way or another, they will have to recognize losses. Many market makers have lost substantial capital on FTX, which means there will be more market space for small-capital traders and more blockchain/exchange arbitration opportunities.
Alameda Research, which participated in 186 projects as a venture fund. Otherwise, we will be waiting for the "sudden" collapse of coin rates after the malicious actions of Alameda/FTX in the coming years.
The industry is also waiting for more regulation, since it’s clear by now that ordinary users must be protected from such situations. One of FTX's major co-investors said, "Institutional capital will no longer invest in the crypto industry until it is fully regulated."
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