An overview of the FTX crisis. The price of cryptocurrencies plummeted

FTX’s fall is causing a big shake in the crypto market pushing the price of BTC down to below $16k/BTC, a new 2-year low. The price of FTT, FTX’s native token, has fallen by more than 90% while SOL’s price has dropped by more than 50% since the crisis was triggered on 3.11. To provide you a more complete understanding of the issue, TechBiz will outline the key events of this crisis in this article. The beginning of this event came on November 3 when Coindesk abruptly made public the Alameda Research Fund’s balance sheet, which was dated at the end of June this year and made evident the Fund’s serious financial problem. Alameda is another business arm owned by Sam Banksman Fried, the owner of the FTX exchange. Accordingly, the estimated 14.6 billion in assets of the Fund were primarily allocated on native tokens issued by FTX, including FTT, SOL, and a few more minor “brother and sister” tokens. This showed the close connection between Alameda and FTX even though the two were declared to be separate entities. This serious liquidity shortage made investors worry about potential problems for FTX. Following the disclosure of these findings, CZ, the CEO of Binance, shook the whole cryptocurrency world on November 7 when he declared that Binance would sell off all of the FTT tokens that Binance held, which was estimated to be worth $588 million. The reason given by CZ was: “the liquidation of our FTT is just a risk management measure drawn from the lessons of LUNA”

Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.

— CZ 🔶 Binance (@cz_binance) November 6,

However, CZ also implied in his tweet that Binance was taking this action in response to “those that campaign against other industry participants behind their backs.” This statement by CZ led many people to believe that CZ is referring to SBF, the owner of FTX, who had taken various acts that were against the decentralization of the cryptocurrency market. Sam had been known for having close ties to the political elite and has donated generously to several US politicians, including President Joe Biden. Sam used to incite resentment by endorsing and promoting a draft cryptocurrency law that had numerous drawbacks for Defi developers. Sam even created “Possible Digital Asset Industry Standards,” which were published on October 19. In response to CZ’s announcement, Alameda Research Foundation’s CEO, Caroline Ellison, tweeted that the company would buy all of Binance’s FTT tokens at $22. This offer was thought to save FTX’s face because it seemed to imply that FTX still had the resources to make the payment. But it didn’t work out that way. Binance’s action caused many people to question FTX’s actual liquidity and worry about the possibility of this exchange collapsing. As a result, users subsequently made massive withdrawals of their assets from the exchange, resulting in unheard-of chaos at the world’s second-largest cryptocurrency exchange. The drastic drop in the prices of FTT’s and SOL further proved that FTX was seriously lacking in liquidity. The price of FTT and SOL had dropped much less than the $22 but FTX still couldn’t buy them to lift up the prices. 72 hours after CZ’s statement, Sam announced that FTX and Binance came to “an agreement on a strategic transaction for FTX”.

1) Hey all: I have a few announcements to make.

Things have come full circle, and https://t.co/DWPOotRHcX’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for https://t.co/DWPOotRHcX (pending DD etc.).

— SBF (@SBF_FTX) November 8,

Soon later, the CEO of Binance CZ acknowledged on Twitter that FTX had indeed asked Binance for help. There was a significant liquidity crunch at FTX. The two parties signed a non-binding agreement for Binance to fully acquire FTX and cover the liquidity crunch after a full due diligence that would take place in the following days.

This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.

— CZ 🔶 Binance (@cz_binance) November 8,

However, only half a day after conducting the due diligence, Binance has officially announced that they would not further pursue the potential acquisition of FTX. This served as additional proof that FTX’s liquidity issue was more severe than anticipated. It appeared like FTX was completely dependent on the tokens this company was holding and absolutely had no supply of liquidity to resolve the issue. Earlier, Binance published a Tweet somehow explaining its stance and the reason for the decision to drop this deal: “Every time a major player in the industry fails, the single user suffers. Over the past few years, we have seen that the crypto ecosystem is becoming more resilient, and we believe that exceptions for misuse of user funds will be eliminated by the free market.”

Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.

— Binance (@binance) November 9,

CZ also withdrew lessons on an exchange’s transparency and the key management principles for a crypto business which seemed to be related to the problems of FTX: having a enough amount of liquid assets on hand at all times, never using a token you create as collateral, and avoiding from taking out loans when operating a crypto business.

Two big lessons:

1: Never use a token you created as collateral.

2: Don’t borrow if you run a crypto business. Don't use capital "efficiently". Have a large reserve.

Binance has never used BNB for collateral, and we have never taken on debt.

Stay #SAFU.🙏

— CZ 🔶 Binance (@cz_binance) November 8,

After the decision of CZ and Binance, users continued to withdraw assets in large quantities from FTX, which led this exchange to lock the withdrawal feature. The crypto market fell precipitously. The lowest price of BTC dropped below 16k/BTC, the price of FTT dropped by 90% and SOL dropped by more than 50%. Over $200 billion had evaporated from the crypto market evoking memories of the earlier LUNA catastrophe. Sam’s asset also decreased by more than 90%, to just under $1 billion. The Alameda Research Foundation’s website is now hidden from public view while users’ cash withdrawals are frozen. About half a day after Binance’s decision, Sam admitted defeat and apologized to users, hinting that this was Binance’s plan to stab FTX: “Good game. . You won.”

20) At some point I might have more to say about a particular sparring partner, so to speak.

But you know, glass houses. So for now, all I'll say is:

well played; you won.

— SBF (@SBF_FTX) November 10,

There are many controversial viewpoints and hypotheses about the fall of FTX this time. Many industry experts believe that FTX not only won’t be able to recover, but also will face significant legal risks. Above all, this should serve as a lesson for all cryptocurrency exchanges and businesses. Since investor confidence is now more severely impacted than ever, exchanges are required to show more transparency and take more prudent security measures to protect the assets investors retain on them if they want to boost the market and win back investors’ trust.