Recently, you might have heard of the FTX collapse all over the news, and how it lost billions and billions of dollars. Well, here’s basically what went down, explained in a way for high schoolers to understand.
FTX is a digital currency exchanging platform. It was a place where cryptocurrencies could be sold and bought, such as bitcoin or ethereum. Think about it as a stock market, but for cryptocurrencies. Due to the fact that crypto was an emerging technology and was difficult to handle, many turned towards platforms such as FTX to sell and buy cryptocurrencies. FTX appeared to be doing very well for a pretty long time. That was until the balance sheet of a major crypto investing firm that worked with FTX, Alameda, was revealed.
It turns out that Alameda was holding a large amount of cryptocurrency made by FTX, called FTT. If the FTT price dropped, Alameda would be at risk of solvency, so FTX’s rival Binance, another crypto platform, sold all of its FTT. People became scared that due to FTT’s drop Alameda and therefore FTX would face collapse, so they began to pull their money from the platform. Normally, people pulling money from FTX wouldn’t have caused a collapse, but it turns out that Sam-Bankman Fried, the CEO, was hiding an unbalanced balance sheet. Essentially, there was far less money than there was supposed to be- highly probable that Sam-Bankman Fried utilized investment money meant for the platform into the cryptocurrencies themselves as well as other money not supposed to be used for cryptocurrency trading. This failure of financial management led to the company only being able to recover a fraction of what they hoped to recover, 740 million. This then led to Sam-Bankman Fried stepping down as the CEO and FTX facing bankruptcy. Binance was going to buy out FTX, but pulled out due to regulatory investigations and reports of mishandled funds.
Sam-Bankman Fried is therefore currently under investigation by the department of justice for mishandling funds and fraud for over 1.9 billion dollars. This collapse has shook the crypto market, causing it to lose billions of dollars and fall below the trillion dollar valuation. It also has further reaching implications on the future of crypto, and many have been calling for more regulations.
Sources:
https://www.nytimes.com/2022/11/10/technology/ftx-binance-crypto-explained.html
https://www.nbcnews.com/tech/crypto/sam-bankman-fried-crypto-ftx-collapse-explained-rcna57582