Anatomy Of The FTX Crash
The crypto market experienced its biggest shock last week since the death spiral of Terras's UST stablecoin in May. FTX, the world’s second-largest cryptocurrency exchange, went under. The collapse of FTX appears to have been precipitated by a Coindesk article published on November 2, 2022. This article discussed Alameda's balance sheet and raised questions about FTX. Many of these concerns centred around whether funds from FTX were making their way to Alameda, given that both companies were founded and run by the same people: Sam Bankman-Fried (SBF) and his friend Gary Wang. FTX appears to have spent upwards of USD 10 billion to prop up Alameda.
Alameda Research is a cryptocurrency trading firm that rose to prominence in 2018 after making massive profits by purchasing cheap Bitcoin in the United States and selling it in Japan, where Bitcoin prices were much higher. In fact, Alameda actively traded almost every cryptocurrency on every exchange and later became a market maker, which means it provided cryptocurrency to exchanges for their users to trade with. Alameda quickly became one of the largest crypto market makers and the largest recipient of all USDT ever printed by Tether.
The catalyst for FTX's collapse was Binance CEO Changpeng Zhao's tweet, which stated that Binance would be selling its FTT stake in light of the Coindesk revelations about FTX's relationship with Alameda. This drove down the price of FTT, and triggered a bank run at FTX. Since FTX had given Alameda the majority of its user assets to plug a multi-billion-dollar hole in its balance sheet created by Terra's collapse, FTX did not have enough cryptocurrency on hand to honour user withdrawals. Binance later offered to buy FTX, but the deal fell through due to balance-sheet concerns.
FTX, Alameda Research, and even FTX US declared bankruptcy late last week, along with their 100-plus subsidiaries. SBF and his inner circle are "under supervision" in the Bahamas, where FTX is based. Meanwhile, up to a billion dollars in FTX user funds appear to be in transit as a result of a hack.
At this time, the two most pertinent questions are: 1. when will the billions of dollars in customer crypto be recovered, and 2. how much damage will the FTX-Alameda situation cause to the crypto market? The consequences of this fallout are still being felt. Those cryptocurrencies with direct exposure to FTX and Alameda have been hit the hardest. Both entities are thought to have invested in over 250 cryptocurrency projects.
Solana is currently at the top of this list, followed by Aptos, Arweave, Apecoin, Near Protocol, and Algorand. Solana was the de facto exchange chain for FTX; both FTX and Alameda used Solana for almost everything DeFi, NFTs, and even the issuance of wrapped cryptocurrencies, all of which are now worthless. There is a big question mark Solana's future.
The same is true for the Near protocol and Apecoin. Two of the largest investors in the Bored Ape Yacht Club were FTX and Alameda. As for Aptos, FTX was one of its biggest investors and was also actively advising the project. In the case of Arweave and Algorand, FTX and Alameda did not appear to have direct exposure. Crypto VC Multicoin Capital, on the other hand, confirmed that ten percent of its assets are stuck on FTX. To fill this void, Multicoin may sell Arweave, Algorand, and other alts.
It is estimated that over USD 2 billion in SOL is held by FTX and Alameda. This is roughly equivalent to their Serum token holdings. Maps.me appears to be next, with at least USD 600 million in exposure, Aptos with at least USD 300 million in exposure, and Oxygen has at least USD 50 million in exposure. To compensate FTX investors and users, FTX and Alameda will most likely liquidate all of these cryptos in the coming months.
The collapse of FTX has shaken investor confidence, with ramifications reverberating across the nearly USD 1 trillion industry. Institutions have also taken a beating. Temasek's USD 275 million stake in FTX has been written off. Other international investors included BlackRock, Sequoia Capital, and the Ontario Teachers' Pension Plan. The crypto industry remains volatile, and companies and protocols with FTX exposure will need to demonstrate their liquidity.
This will be a difficult crypto winter for the industry.
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