FTX, once the second largest cryptocurrency exchange in the world, is now worthless, according to one of the company’s early investors.
In a note to partners, venture capital firm Sequoia announced that it had written down its investment in FTX to the value of $150 million. (£130 million).
“In recent days, a liquidity crunch has created a solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking down our investment to $0,” the investors wrote in a message signed by Team Sequoia.
Other investors have lost similar amounts, including the Ontario Teachers Pension Plan, which invested about $400 million last year. on the stock exchange, and valued FTX at $25 billion.
The cryptocurrency market came under pressure following the FTX crisis, with digital asset cornerstone bitcoin down 7.6% over the past 24 hours to $16,775 and the second largest, ethereum, down 4.4% to $1,205.
The bank’s “liquidity crisis”, fueled by a rush of withdrawals from FTX, led to a pause in all cash flows on Tuesday morning. But if the crisis has become a solvency risk, it suggests the company had invested customer deposits in illiquid assets, forcing it to choose between an accelerated sale at low valuations or a complete halt to payouts.
In posts sent shortly before FTX was engulfed in crisis, its owner, entrepreneur Sam Bankman-Fried, insisted that was not the case. “FTX is fine. Assets are fine. FTX has enough to cover all client holdings,” he said in tweets that he has since deleted. “We do not invest client assets (even in treasuries).”
Since then, Bankman-Fried has changed its message, telling investors that the company needs $8 billion. USD to cover withdrawal requests, according to multiple reports.
The sudden collapse in value was prompted by leaked documents which suggested that Alameda Research, a hedge fund closely intertwined with FTX through its common owner, Bankman-Fried, was effectively insolvent.
Alameda’s accounts rested on a token, FTT, that was issued by FTX and had no value other than that guaranteed by the exchange, according to the documents.
That revelation turned into a crisis when Binance, the largest cryptocurrency exchange, announced that it would sell its own large stake in FTT. The fire sale that followed plunged the value of the token well below the $22 floor that FTX had committed to supporting, prompting the equivalent of a bank run at FTX itself as customers raced to withdraw their deposits faster, than the stock exchange could process them.
The battle between the two exchanges briefly turned into an alliance when Binance agreed to make a non-binding offer to bail out FTX and merge with it. But on Wednesday evening the deal fell through.
“As a result of the company’s due diligence, as well as recent news reports of mishandled customer funds and alleged US agency investigations, we have decided not to pursue the potential acquisition of FTX.com,” Binance said.