Until recently, FTX Trading was the toast of the cryptocurrency world.
By 2021, the company’s revenue increased by more than 1,000% to $1 billion as it capitalized on public interest in digital currencies’ potential to build wealth. FTX also trumpeted its brand with splashy Super Bowl commercials featuring quarterback Tom Brady and comedian Larry David. To underline its meteoric rise in business, the company bought the naming rights to the American Airlines Arena in Florida for $135 million and renamed it the FTX Arena.
A year later, FTX now finds itself on the brink of bankruptcy, facing billions of dollars in losses and a federal investigation. The company’s meteoric rise and sudden plunge—along with the fate of its respected founder and CEO, Sam Bankman-Fried—looks like nothing less than the dizzying swings of cryptocurrency itself.
A deal gone bad
The rapid turnaround in FTX’s fortunes has shocked the cryptocurrency world. On Tuesday, the CEO of rival crypto exchange Binance, Changpeng Zhao, said his company had reached an agreement toBut he which raises questions about FTX’s financial viability.
In a subsequent call with investors, Bankman-Fried said FTX needed about $8 billion to back up the crypto assets users hold on the platform, Bloomberg News reportedHe also said that without an imminent infusion of cash, the company may have to file for bankruptcy, according to Bloomberg.
FTX did not immediately respond to a request for comment. Bankman Fried tweeted on Thursday that FTX “is spending the week doing everything we can to raise liquidity.”
“Every penny of that — and of the existing security — will go directly to users unless or until we’ve done right by them,” he tweeted.
A bankruptcy of the world’s third-largest crypto exchange would shake up an industry that has long attracted unwanted attention from financial regulators and lawmakers, experts told CBS MoneyWatch.
“This will be a psychological shock to the industry to say $8 billion in client assets is gone,” said Josh Peck, an expert on crypto risk. “It’s a big deal. People will be suspicious. [and] they’ll say things like bitcoin are over.”
Adding to FTX’s woes, the US Securities and Exchange Commission is now investigating the company for possible violations, according to the Associated Press reportedRegulators are trying to determine whether employees at FTX’s trading arm Alameda Research used client funds to place risky bets on the market.
Deluge of withdrawals
FTX’s liquidity problems started months ago when Bankman-Fried said he used incorrect data to make the company’s financial projections.
In a series of apologetic tweets, the CEO said he had mistakenly believed the company had enough cash on hand to pay 24 times the amount users typically withdraw in a day; In fact, FTX only has enough money to pay 0.8 times the amount – a dangerously risky cushion for a crypto exchange. The miscalculation came back to haunt FTX last weekend in a deluge of withdrawals from users.
“Because of course, when it rains, it pours,” Bankman-Fried tweeted. “We saw about $5 billion in withdrawals on Sunday — the largest by a huge margin.”
A big crypto sale thatis also partly to blame for what is now happening at FTX. Popular tokens such as bitcoin, ether and ripple have all lost value in recent months, ,
In response to the crypto crisis, FTX lent $500 million to Voyager Digital in June, hoping to help the crypto-lending platform weather a longer-than-expected downturn, CNBC reportedThe move proved to be expensive for FTX as Voyager Digital submitted filed for bankruptcy a month later, and FTX later paid $51 million to buy Voyager out.
FTX took another financial hit when Binance offloaded its remaining FTX tokens, called FTT, which it received as part of its $2.1 billion exit from FTX last year.
,Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” Zhao tweeted on Sunday.
Bankman-Fried didn’t mention bankruptcy in his tweets, but he promised to do justice to users. However, FTX suspended withdrawals on Thursday, a move that Peck said is hurting customers even if the company is not going bankrupt.
Despite the likely industry shockwaves if FTX collapses, the crypto sector has about a dozen other “high-quality” exchanges to absorb demand, Peck said. The value of most cryptocurrencies is also unlikely to budge — with the exception of one, he said.
Alameda Research owns a large amount of solana, and a bankruptcy would likely freeze these coins for an unknown period of time.
“It will still be a tragic circumstance because customers of FTX will have lost a lot of money,” Peck said. “But eventually the industry will adapt to this.”