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Monday, March 20, 2023

In the blink of an eye, FTX Trading goes from crypto boom to bust

Until recently, FTX Trading was the toast of the crypto world.

In 2021, the company’s revenue soared more than 1,000% to $1 billion as it capitalized on public interest in the potential of digital currencies to generate wealth. FTX also trumpeted its brand with eye-catching Super Bowl ads featuring quarterback Tom Brady and comedian Larry David. Underscoring its meteoric rise in the corporate world, the company bought the naming rights to American Airlines Arena in Florida for $135 million and renamed it FTX Arena.

A year later, FTX now sits on the brink of bankruptcy, facing billions of dollars in losses and a federal investigation. The dizzying rise and sudden fall of the company, along with the fate of its respected founder and CEO, Sam Bankman-Fried, resemble nothing less than the dizzying swings of cryptocurrencies themselves.

A deal gone wrong

The rapid turnaround in FTX’s fortunes has shocked the cryptocurrency world. On Tuesday, the CEO of rival crypto exchange Binance, Changpeng Zhao, said his company had reached an agreement to acquire FTX. But left the movement a day laterwhich raises questions about the financial viability of FTX.

In a subsequent call with investors, Bankman-Fried said that FTX needed about $8 billion to back crypto assets that users hold on the platform, Bloomberg News reported. He also said that without an imminent infusion of cash, the company might have to file for bankruptcy, according to Bloomberg.

FTX did not immediately respond to a request for comment. Bankman-fried tweeted on Thursday that FTX is “spending the week doing everything it can to increase liquidity.”

“Every penny of that, and existing warranty, will go directly to users, unless or until we’ve done the right thing for them,” he tweeted.

The bankruptcy of the world’s third-largest crypto exchange would shake up an industry that has long drawn unwanted attention from financial regulators and lawmakers, experts told CBS MoneyWatch.

“This is going to be a psychological shock to the industry saying $8 billion worth of customer assets are gone,” said Josh Peck, a crypto risk expert. “That’s a big problem. People will be suspicious. [and] they’re going to say things like Bitcoin is over.”

Compounding FTX’s problems, the US Securities and Exchange Commission is now investigating the company for potential violations, the Associated Press reported. Regulators are trying to determine whether employees of FTX’s trading arm, Alameda Research, used customer funds to place risky bets on the market.

Flurry of withdrawals

FTX’s liquidity problems began months ago when Bankman-Fried said it used incorrect data to make financial projections for the company.

In a series of apologetic tweets, the CEO said he had mistakenly believed the company had enough cash on hand to pay out 24 times the amount of money users typically withdraw in a day; in fact, FTX only has enough cash to pay out 0.8 times the amount, a dangerously risky cushion for a cryptocurrency exchange. The calculation error came back to haunt FTX this past weekend in an avalanche of user withdrawals.

“Because of course when it rains, it pours,” Bankman-Fried tweeted. “We saw approximately $5 billion in withdrawals on Sunday, the largest by a large margin.”

A huge cryptocurrency sell-off that started late last year it’s also partially to blame for what’s happening now at FTX. Popular tokens like bitcoin, ether, and ripple have all lost value in recent months. causing casualties in places like Celsius and Coinbase.

In response to the crypto crisis, FTX lent $500 million to Voyager Digital in June, hoping to help the crypto lending platform weather a longer-than-expected downturn, CNBC reported. The move proved costly for FTX as Voyager Digital filed for bankruptcy a month later, and FTX later paid $51 million to buy Voyager.

FTX took another financial hit when Binance dumped its remaining FTX tokens, called FTT, which it received as part of its $2.1 billion FTX outflow last year.

Due to the recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” Zhao tweeted on Sunday.

Bankman-Fried did not mention bankruptcy in her tweets, but promised to do the right thing for users. However, FTX suspended withdrawals on Thursday, a move that Peck says hurts customers even if the company doesn’t go bankrupt.

Despite the likely industry shockwaves if FTX collapses, the cryptocurrency sector has about a dozen other “high-quality” exchanges to absorb demand, Peck said. The value of most cryptocurrencies is also unlikely to budge, with the exception of one, he said.

Alameda Research owns a large amount of solana, and a bankruptcy would likely freeze those coins for an unknown period of time.

“It will still be a tragic circumstance because FTX customers will have lost a lot of money,” said Peck. “But ultimately the industry will adapt to this.”

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