In less than a week, a 30-year-old entrepreneur once hailed as a modern-day J.P. Morgan watched his digital empire, including billions of his own fortune, evaporate in a death spiral that's shaken the foundations of the trillion-dollar crypto industry.
On Thursday, Sam Bankman-Fried issued a mea culpa: "I f**ked up," he wrote in a lengthy Twitter thread, apologizing to investors and customers of FTX, the exchange platform he founded in 2019.
Failures are not uncommon in the murky, largely unregulated world of crypto, but FTX is not your average crypto startup. Its near-collapse this week represents a potential turning point for an industry that many critics say has been given a pass for far too long.
So, what happened to FTX, and why is the entire crypto space freaking out about it? There are still a lot of uncertainties, but here's what we know.
Fishy finances
Last week, the crypto news website CoinDesk published an article based on a leaked financial document from Bankman-Fried's hedge fund, Alameda Research.
The report suggested that Alameda's business rested on shaky financial footing. Namely, that the bulk of its assets are held in FTT, a digital token minted by Alameda's sister firm, FTX. That was a red flag for investors, as the companies were, on paper at least, separate. Alameda's disproportionate holdings of the token, however, suggested the two were much more closely linked.
Then, the CEO of Binance, FTX's much larger rival, lit the match that would set FTX's world on fire, tweeting that his company would liquidate its entire $580 million worth of FTX holdings. Cue the liquidity crisis.
Rivals come together
As I wrote here earlier this week, FTX and Binance managed to put their CEOs' bad blood aside just long enough to throw together a bailout for FTX.
But that deal fell apart about as quickly as it came together. Binance took one look under the hood and decided to bounce.
Meanwhile, Bankman-Fried's personal fortune also tumbled. According to the Bloomberg Billionaire Index, Bankman-Fried's net worth cratered 94% in a single day, from more than $15 billion to just under $1 billion — the biggest one-day loss ever clocked by the index. (The estimate of his wealth was based on the assumption that Binance would ultimately bail out FTX, where much of Bankman-Fried's personal assets are held. Which means his net worth may have farther to fall.)
Damage control
The full extent of FTX's financial problems aren't yet known, but multiple reports say the firm is facing an $8 billion shortfall. Without a quick infusion of equity, Bankman-Fried reportedly told investors Thursday, the firm is facing bankruptcy.
How did FTX fail so catastrophically?
Despite its reputation as a dependable, low-risk investment portal, FTX's business appears to have been built on a complex, extremely risky kind of leveraged trading.
Customers put their money to engage in crypto trading. But it seems FTX took billions of dollars worth of that money and loaned it out to its sister firm, Alameda, to fund those high-risk bets, according to The Wall Street Journal.
Bloomberg columnist Matt Levine put it another way: "FTX took its customers' money and traded it for a pile of magic beans, and now the beans are worthless."
At the end of the day, FTX experienced the crypto equivalent of a classic bank run. Customers wanted their money out, and FTX didn't have it.
In traditional finance, customers' funds are protected by the Federal Deposit Insurance Corporation, which insures deposits. The FDIC does not insure stocks or cryptocurrencies, however, leaving the fate of FTX's customers and investors in question.
What's next?
On Thursday, Bankman-Fried said Alameda Research would wind down trading while FTX focuses on emergency fundraising.
But after Binance, the biggest exchange in the industry, balked at rescuing its rival, FTX may have few options.
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