Officially headquartered in the Bahamas and led by chief executive Sam Bankman-Fried,FTX is (or was),a cryptocurrency ‘exchange’ that facilitated the buying and selling of cryptocurrencies,similar to the role that a broker performs for us Luddites who prefer to invest in real companies. FTX had also created its own currency ‘FTT’ (because that’s a normal thing these days).
The dominoes started falling last Monday when rumours spread Bankman-Fried’s hedge fund Alameda Research held billions ofdollars worth of FTT which it used as collateral for loans in other risky investments. This meant any fall in the value of FTT could expose both the hedge fund and FTX to enormous losses. More news came that FTX lost over $US10 billion ($15 billion) in customer money trying to fund other risky bets,among them putting client funds towards the Democratic party ahead of the midterm elections.
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The next day,Changpeng Zhao – one of the largest single holders of FTT and head of its largest competitor,Binance – sold their $US580 million holding of FTT,uncomfortable with the alleged financial smoke and mirrors Bankman-Fried was performing. This sparked a classic liquidity crunch as other investors bolted for the door,with the fear spreading across the broader crypto market. Bitcoin plummeted to its lowest level in two years,after losing 17 per cent of its value in just five days.
In less than the space of a week,the second largest exchange in the world had filed for bankruptcy,Bankman-Fried had resigned as CEO,also filing for bankruptcy,while owing $650 million to lenders. The exchange also had a reported$US515 million of customer funds stolen.
Bloomberg now values FTX at $1 from $32 billion just one day prior. The extent of the damage is yet to be realised,with even a Canadian teacher’s pension fund disclosing it had a$95 million hole due to its investment in FTX. Investors are unlikely to see their money again.