The Crash of Bitcoin and What FTX Has to Do With It: Everything You Need to Know

Almost six months ago, in the world of cryptocurrencies, there was a high-profile scandal associated with the collapse of the stablecoin market - digital currencies pegged to the rates of the real ones. Now the crypto-financial market is shaking again: the first cryptocurrency - bitcoin - was rapidly falling, losing a quarter of its price. On November 10, its rate dipped below $16,000. Bitcoin's fall dragged alternative cryptocurrencies as well. Some analysts have already dubbed what is happening the "beginning of the end" of the cryptocurrency world - again. So, what happened in the market, what does it have to do with the largest exchange Binance and FTX? We have collected in one review a complete chronology of events of the conflict between these cryptocurrency exchanges. Let's get to the bottom of it.

What Is FTX?

Sam Bankman-Fried, 30, graduated from one of the world's most prestigious tech universities, Massachusetts-based MIT. After that, he traded on Wall Street for several years, and in 2019 he founded his own cryptocurrency trading platform, FTX, and trading firm, Alameda Research. In just a couple of years, Bankman got rich trading cryptocurrency and made Forbes' ranking of billionaires under 30.

At its peak, Alameda Research managed $15 billion in assets. Bankman's earning scheme was quite simple — he actively invested in a broadly diversified portfolio of crypto assets. That is, he purchased various cryptocurrencies, including little-known ones (called shitcoins in the jargon), using the funds of his platform's users. Bankman was doing well until mid-2022 when investors estimated his FTX exchange at $25 billion to $32 billion.

But in early November, CoinDesk experts released an investigation stating that the FTX exchange was insolvent, its assets were diluted, and not backed by any real funds.

At the same time, Bloomberg reported that the Securities and Exchange Commission (SEC) had been investigating the Bankman platform for months, suspecting its owners of misappropriation of funds. However, rumors that Bankman and his partners were spending hundreds of millions of dollars at their own discretion had circulated before.

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After the news, concerned investors began withdrawing funds from the exchange and selling its token FTT. Its rate plummeted by 72% by November 9. Another guru of the cryptocurrency world - the head of Binance, Changpeng Zhao - added more oil to the fire.

What Does CZ Have to Do With All That?

Changpeng Zhao, 45, is the CEO of the world's largest cryptocurrency exchange Binance and has a net worth of $65 billion according to Forbes, and is known by his moniker CZ. Among other things, Changpeng owns $500 million worth of Bankman's FTT tokens, and after the CoinDesk investigation came out, Changpeng announced that he planned to sell them. Which only added to the panic of other investors.

Recall that the cryptocurrency FTT came under the control of Binance as part of the withdrawal of companies from the portfolio investment FTX. It is known that the cryptocurrency exchange sold its stake for $2.1 billion.

The reason for this decision, according to the businessman, was the "recent revelations" of the company. Changpeng Zhao was probably referring to the CoinDesk investigation of November 2, 2022. It revealed suspicious transactions between FTX and Alameda Research and suggested that the latter was insolvent.

Both organizations are connected by their founder Sam Bankman-Fried, the richest man in the crypto industry according to Forbes 2021. Notably, Alameda Research is the subject of many major scandals. For example, in April 2022 the company was accused of manipulating the WAVES token.

Changpeng Zhao also said that the decision to sell FTT was influenced by a reluctance to "support people who act against other industry players behind their backs." It is not known which actions of Sam Bankman-Fried companies so angered the head of Binance.

It should be noted that the conflict with one of its first investors, Binance, has been a longstanding problem for the companies, as FTX has successfully occupied the U.S. market and hindered the growth of Binance. Last week, it was revealed that FTX had a liquidity shortage of about $8 billion and had actually used client assets to invest in its subsidiary. Binance and FTX signed a letter of intent to take over the latter, but after a one-day review they backed out of the deal, citing that "the hope was to help FTX customers provide liquidity, but the problems are beyond our control or ability to help." U.S. authorities subsequently launched investigations into FTX, Binance US, and Coinbase.

Crypto analysts eventually agreed that Changpeng simply took advantage of Bankman's problems, compounded them by selling FTT tokens, promised to help, and then withdrew that promise. And in doing so, he pushed the precarious position of the world's top-3 crypto exchange to collapse. And since virtually all crypto assets are interconnected in one way or another with blockchain platforms, mutual ownership, and stakes, the collapse of a major platform like FTX dragged bitcoin and all other digital currencies down with it.

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Conflict Of Crypto Billionaires

The whole situation might be explained by the conflict between two billionaires, who were partners for three years. Fried, who became the youngest billionaire on Forbes' $22.5 billion list at age 29 in 2021, was serious about pursuing a political or quasi-political career after that. Fried promised to spend an additional $100 million or even $1 billion on political sponsorship during the 2024 elections, while publicly lobbying heavily for the DCCPA's bill, which he called "the killer of decentralized finance" by proposing strict regulation of the cryptocurrency market and de facto anonymity of its participants. Changpeng, on the other hand, has always been an ardent opponent of restrictions and even left the U.S. this summer, announcing that Binance now has no central office to regulate.

Among investors and traders, there is a view that everything that is happening around FTX – an attempt "through the public execution of the project to drop bitcoin to buy it at an even lower price, and at the same time to get liquidity for its subsequent promotion". There is no doubt that the main casualties in this situation are the retail investors who invested their assets in all these projects and now have to sell them at a lower price.

Most professionals agree that this was a deliberate "drain." Changpeng Zhao 100% has direct Bankman-Fried contact, and this issue could have been resolved behind closed doors if desired, but CZ deliberately did not do so. His public actions destroyed one of the strongest competitors, severely depleted the major competitor, BSC (Solana network, associated with Fried and Alameda), and, in addition, led to the elimination of about a billion dollars worth of positions. Too good to be an accident. In addition, all eyes were on the U.S. midterm elections that day. Of course, FTX management drove themselves into such a situation, but everything could have been solved with much fewer losses than it ended up.

What Does This Hold for the Crypto Industry?

First, the collapse of FTX will be investigated by U.S. authorities and will likely accelerate regulatory action in this area, making it more transparent and attractive to institutional investors. Lack of regulation is one of the main reasons for the delayed institutional adoption of cryptocurrencies. Some believe that the authorities will take stronger checks on the crypto industry, thereby lowering barriers to entry for institutional investors. This will raise the price of all key crypto assets in the medium and long term, despite the current turmoil.

Second, Coinbase has already reported an increase in user inflows over the past week due to the downturn on FTX. The main reason is that people are looking for safer platforms for their investments.

Many are calling the fall of FTX "the Lehman Brothers moment" for the crypto industry. Still, regardless of how the situation develops further, the reputation of cryptocurrency projects has been dealt another blow. Such deals have never been allowed on Wall Street, but often occur in this tough market, which, a decade after its founding, remains nearly unregulated. The FTX crisis will strengthen the position of supporters of strict market regulation, and investors should be reminded that even the most reliable crypto projects are not immune to collapse, which can happen in a matter of days or even hours.

How Can You Protect Your Capital in Such Situations?

To increase the protection of your assets and avoid huge losses in similar situations, you should invest no more than 30% of your funds in cryptocurrency. In addition, you should buy only those cryptocurrencies or stablecoins that have been verified by independent auditors.

In the private case, if you have enough experience, you can try to capitalize on the event, opening a short position on the major cryptocurrencies. AdroFx will help you with this, because here you have an opportunity to earn with CFD contracts, regardless of the situation in the market. To do so, you just need to create an account, fund it and open a short or long position on one or more assets.

If you decide to short one of the altcoins, remember that you should always hedge the risks with the opposite position in one of the powerful projects with high growth potential: BTC or ETH. Besides, since the situation itself is very unstable, you should not start such an activity without the necessary experience and basic knowledge.

Final Thoughts

Part of the cryptocurrency community sees the FTX situation as an example of how moving away from the ideals of maximum decentralization that bitcoin was built on threatens the entire industry. In their view, the dominance of exchanges and other centralized institutions leads to excessive dependence on individuals, reminiscent of the traditional financial system. In response to such concerns, major crypto exchanges have announced their intention to begin publishing "transparent" proof of reserve adequacy directly on the blockchain.

Given the scale of what is happening in the crypto world, it is to be expected that the consequences of the FTX crash will continue to affect the entire market. At this point, the depth of the accumulated problems in the industry is unknown to the public: for example, what other big players were holding liabilities from FTX and Alameda as assets on their balance sheets? This means we have a series of new high-profile bankruptcies ahead of us, and with them, a renewal of cryptocurrency quotes' lows.

All in all, this story does not bode well for the cryptocurrency market in the near future, as confidence in cryptocurrency continues to fall and investors continue to sell assets. But for long-term investors, this is the best time to grab cheaper assets.

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