FTX, Sam Bankman-Fried’s multi billion empire, is down the bankruptcy road. The cryptocurrency ecosystem is shaken. What exactly happened?
Once a hero who even got to be likened to financial titans like Warren Buffett, Mr. Bankman-Fried is now a shadow of his former glorious self.
It’s now emerging that FTX may have misused investor funds by investing it in Alameda Research, a hedge fund firm also founded by Mr. Bankman-Fried. In an interview, he revealed that Alameda Research had borrowed some significant amounts from FTX. “It was substantially larger than I had thought it was,” he said. The size of this borrowing ran into billions of dollars, according to him. Just to make it clear, the top fellows at FTX were taking money from FTX accounts and using it to invest in other crypto assets through Alameda Research. Risky business! This triggered something akin to a bank run.
Suddenly the cash available was not enough for everyone seeking to withdraw their funds. This equalled a liquidity crunch, sending FTX to insolvency and finally declaring bankruptcy.
Overzealous expansion?
If Mr. Bankman-Fried’s explanation for the collapse is to be believed, then it would appear that the root cause at least according to him has something to do with blind and fast expansion. These thoughts are shared by players in the crypto community, who view the collapse as the result of a founder trying to expand his interests too fast in a fragile industry.
Internal messages accessed by The New York Times show a series of mistakes, including failing to listen to advice. It’s also curious to note that no external investor sat on the board of FTX, despite the billions they pumped into the company.
There is also talk of mixing business with pleasure – call it unethical workplace romance. This is not new though but may likely have a share in contributing to the downfall. CoinDesk, the crypto publication, has previously reported that a good number of FTX leaders were involved in romantic relationships, which normally doesn’t go very well.
Well. Be it as it may, the long and short of the story is that a critical number of customers got wind of the misuse of funds. And sensing that their money may no longer be available if they dont’ act, they rush to withdraw their investments. What followed was a massive run in on deposits and with that the FTX empire came down crumpling. That’s how these streets operate. It’s always rosy until those many people who anchor your empire discover that their fortunes are not safe. They take out their dime.
Apparently, Mr. Bankman-Fried had already been dubbed a financial wizard, predicted to be on path to becoming the world’s first trillionaire. Of course those who believed this had every reason to do so because afterall the wizard was already $20 billion strong in fortune, by the age of 30. This in itself alone, was a record in riches!
Most of the crypto world cheered him on, using all nice words to describe him, except anything close to an investors’ funds ‘misuser, if there is such a word. And this is where they got it wrong, of course!
In an interview with MSNBC Opinion Columnist Zeeshan Aleem, crypto critic Stephen Diehl says ” Bahamas is not subject to the same level of regulatory oversight that the United States is’ ‘, pointing out that this too could have contributed to the mega fall. Whenever regulation is scant, anything can explode. For FTX, a bunch of excited fellows in their 20s sitting in air conditioned offices in the Bahamas managed to work their magic on investors all the way from the US to Europe and everywhere in between, and got the money rolling to the Bahamas. What a bunch of lucky ‘youngees’!
Unfortunately, the fall of FTX has sent shivers far and wide across the crypto world and new tech at large. It’s such shockers that send people to default settings. For crypto enthusiasts, it’s another moment to evaluate what the digital currency era truly holds!
