scorecardThe collapse of crypto firm FTX and its superstar founder explained for those who know nothing about crypto
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The collapse of crypto firm FTX and its superstar founder explained for those who know nothing about crypto

Avery Hartmans   

The collapse of crypto firm FTX and its superstar founder explained for those who know nothing about crypto
Investment4 min read
  • Crypto tycoon Sam Bankman-Fried and his exchange platform, FTX, imploded this week.
  • It's a confusing saga that involves massive financial losses, a bankruptcy filing, and potential federal investigations.

If you've been paying attention to the finance world this week, you've likely been sifting through alphabet soup: SBF. FTX. FTT. Maybe even SEC.

Confused yet?

The short story is that crypto tycoon Sam Bankman-Fried and the company he founded, FTX, spectacularly imploded, causing him to lose 94% of his net worth and his title as CEO, and resulting in his crypto empire filing for bankruptcy.

But there's a lot more to the saga, including potential ramifications for the entire crypto market. Here's what happened, and what it all means.

Who is Sam Bankman-Fried and what is FTX?

The Silicon Valley-born, MIT-educated Bankman-Fried, also known as SBF, launched his crypto trading firm, Alameda Research, in 2017, after stints in the charity world and at trading firm Jane Street.

Two years later, Bankman-Fried and his team launched FTX, a crypto exchange platform with perks like low trading fees and advanced options for traders. Bankman-Fried got rich off FTX and Alameda, with the two companies netting $350 million and $1 billion in profit, respectively, in 2020 alone, according to Bloomberg.

At his peak, Bankman-Fried was worth $26 billion, though his net worth had dropped to $16 billion before this week. At 30, he'd already become a major political donor, gotten celebs like Tom Brady and Gisele Bündchen to hawk FTX, and secured the naming rights to the arena where the NBA's Miami Heat play.

So, what happened?

In early November, crypto publication CoinDesk released a bombshell report that called into question just how stable Bankman-Fried's empire really was.

The report found that even though Alameda Research and FTX are two separate companies, Alameda's assets were mostly tied up in FTT, a coin that FTX had invented. Though there's nothing technically wrong about it, it called into question FTX's liquidity, CoinDesk reported.

Just days later, things got worse when Changpeng "CZ" Zhao, the CEO of Binance — arguably FTX's chief rival — decided to liquidate roughly $530 million-worth of FTT. Customers also raced to pull out, and FTX saw an estimated $6 billion in withdrawals over the course of 72 hours, which it struggled to fulfill.

The value of FTT plunged 32%, but rallied once again with Bankman-Fried's surprise announcement on Tuesday, Nov. 8, that Binance would buy FTX, effectively bailing it out.

Then why is FTX still in trouble?

On Wednesday, Binance announced it was walking away from the deal, citing findings during due diligence, as well as reports of mishandled customer funds and the possibility of a federal investigation.

The news sent FTT plunging even further — Bankman-Fried saw 94% of his net worth wiped out in a single day.

Strapped for cash, Bankman-Fried began calling other industry rivals, including Coinbase CEO Brian Armstrong, for a bailout – to no avail. On Friday, FTX filed for Chapter 11 bankruptcy and Bankman-Fried resigned as CEO.

How did this even happen?

In a series of tweets, Bankman-Fried said he "fucked up twice" and chalked up up FTX's implosion to a combination of high customer withdrawals and his own incorrect estimates of how much debt FTX had taken on.

But a Reuters report suggested that there may be other factors at play. The news service, citing unnamed sources, said that earlier this year, Bankman-Fried transferred customer funds from FTX to Alameda without telling anyone, after Alameda was hit with a series of losses.

FTX didn't immediately respond to Insider's request for comment.

Who else does FTX's downfall impact?

FTX is backed by a slew of high-profile investors, including SoftBank Vision Fund, Tiger Global, Sequoia Capital, and BlackRock. Sequoia said this week that it's marking its investment in FTX down to $0 — the storied VC firm had invested $213.5 million in total in FTX.

Then there's Bankman-Fried's inner circle, a group of 10 people who lived with him and ran FTX and Alameda out of the Bahamas. CoinDesk reports that the group was a mixture of his college friends and former colleagues, and were closely tied up in Bankman-Fried's empire. So it's likely they, too, are suffering heavy losses right now.

"Some employees kept their life savings on FTX," an unnamed employee told CoinDesk. "We trusted that everything was fine."

What does it all mean?

It's been a tough year for the crypto market, which suffered a $2 trillion crash back in May.

Now, the FTX drama is creating a ripple effect throughout the crypto industry. It sent the value of the sector down 12% over the course of a day, according to CoinMarketCap, and stoked fears that crypto is about to have its own Lehman Brothers moment.

Industry experts told Insider that the saga might encourage regulators to try to crack down on the crypto industry, or make big banks wary of letting customers trade crypto. What's more, the FTX meltdown could cause confidence in the industry to falter further, leading people to withdraw their crypto assets out of fear — experts call this contagion.

JPMorgan analysts wrote Wednesday that it looks likely a crypto reckoning is coming, and experts warned that investors should be prepared.

"As an investor, you should be seriously questioning what you're investing in if it can evaporate over a weekend," analyst James Royal told Insider on Friday. "The prices are entirely based on sentiment and belief in the future of crypto ... If that belief goes away, you've got nothing."