FTX Exchange: A Comprehensive FTX Overview and the Events Leading to its Collapse

The collapse of FTX was one of the most significant economic events of the past decade. The collapse of the crypto exchange, which was triggered by several underlying causes, ended up costing investors billions of dollars. The former CEO of the company, Sam Bankman-Fried is scheduled for trial in the near future and may face a jail sentence of more than 100 years.

Not only did the collapse of FTX Exchange impact its direct stakeholders but it has also had a major impact on the way(s) people make investment decisions and construct their portfolios. This is largely due to the platform’s orientation around cryptocurrency, which has only existed as a tradeable commodity for about 14 years.

There are a lot of lessons that can be learned from taking a closer look at this collapse. In this article, we will discuss some of the most important things to know about the FTX collapse, including what it was, what caused it, and which changes are likely to occur as a result.

What is FTX?

FTX was once a major cryptocurrency exchange and hedge fund. Though the company still exists, FTX (formally known as FTX Trading Ltd.) has been experiencing Chapter 11 bankruptcy since November 2022. The bankruptcy was triggered by a significant collapse in late 2022, which garnered a notable amount of attention for being, to date, the largest of its kind within the industry.

Before its eventual fall, FTX was able to quickly establish itself as a major cryptocurrency exchange for several reasons. While the exchange had an impressive financial backing, it was also easy enough to use that it appealed to new investors. Additionally, users could use the exchange to efficiently change between cryptocurrencies and global currencies, including the US Dollar (USD).

The exchange enabled investors to hold a variety of different positions, including highly leveraged positions, future positions (both long and short), options, MOVEs, spot markets, and more. Additionally, the presence of more than 50 different cryptocurrencies helped make it easy for investors to build complex, personalized portfolios. Supporting services, such cryptocurrency swaps and a nonfungible token (NFT) marketplace, also helped to popularize the platform.

The changes sparked by the COVID-19 pandemic inspired many novice investors to explore the world of alternative investments for the very first time. Myriad celebrity and corporate partnerships—as an endorsement from Shark Tank’s Kevin O’Leary—helped “normalize” the exchange and increase its appeal to the general public.

There was certainly a point in time when FTX seemed to have a bright future. A combination of mismanagement, misrepresentation, and greed, however, would eventually lead to its collapse.

FTX History

FTX was officially founded in May 2019. The original founders were Sam Bankman-Fried—who is currently facing a variety of serious charges—and Zixiao “Gary” Wang. The exchange, which is shorthand for “futures exchange” was a follow-up to another project of Bankman-Fried’s, known as Alameda Research.

By the end of 2019, FTX had begun to raise a considerable amount of capital, including more than $100 million from one of the major stakeholders of Binance. As capital continued to pour in over the course of the next year, including during the early stages of the COVID-19 pandemic, FTX further solidified its position by acquiring the purchase of the crypto trading app Blockfolio.

2021 was a major year for FTX marked by several significant events. In addition to Bankman-Fried buying out his original partner, Gary Wang, the company also made the decision to relocate its headquarters to the Bahamas. The company also continued to raise capital from major firms around the world.

At the beginning of 2022, FTX launched a connected venture fund with the title “FTX Ventures.” The enterprise continued its ambitious expansion, seeking new capital and opportunities along the way. Some of the most notable components of this expansion included the acquisition of other projects, expanding into the world of NFTs and digital gaming, and more.

FTX—who had also begun pursuing high-profile marketing deals with organizations such as Major League Baseball (MLB)—had established itself as a Silicon Valley staple and had even become a bit of a household name. However, towards the end of Summer 2022, the company began running into some serious problems, including being issued a cease and desist letter by the FDIC.

The letter claimed that FTX had intentionally misrepresented itself, suggesting that deposits made in the fund would be covered by the FDIC (which ensures certain accounts up to $250,000). In fact, the FDIC did not cover deposits as FTX had suggested, which was a realization that began to immediately scare depositors.

The problems for FTX quickly began to accumulate, including investigations into the sale of unregistered securities and the resignation of the company’s US President, Brett Harrison, who was facing intense scrutiny from the FDIC and other regulators.

By September 2022, the Wall Street Journal, Bloomberg, and other major media outlets had begun publishing details regarding FTX’s ongoing corruption. The ethically flawed relationship between FTX and Alameda Research—a company that Bankman-Fried had previous ties to—was frequently called into question. According to the reports, FTX and Alameda Research had an unspoken liquidity agreement, ultimately putting depositors’ assets at risk.

The mishandling of finances, which was largely blamed on Bankman-Fried, only made matters worse. In addition to facing investigations from the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), FTX lost out on a lucrative deal with Binance and, expectedly, was also rapidly losing its client base.

FTX Collapse

By November 10, 2022, FTX was experiencing a liquidity crisis comparable to a bank run in the pre-FDIC era. In response to the spike in demand for withdrawals, Bankman-Fried had begun actively seeking an outside capital infusion, causing many depositors to begin fearing the possibility of losing their money.

On November 10, Bankman-Fried made a statement attempting to calm depositors and rhetorically accept some responsibility for what had happened. He also stated that Alameda Research would no longer be operating. However, Alameda Research also owed a significant debt—about $10 billion—which was the result of a likely illegal transfer between the two companies. At the time, FTX appears to have had knowledge about the transfer.

Over the next few days, the legal and financial problems faced by FTX continued to snowball. The company was forced to shut down its operations in Japan and faced challenges in several other countries, as well. Problems with the company’s charitable fund, problems with unauthorized transactions, and other major issues continued to mount. Employees had begun dumping their assets and the public, in general, also followed suit.

During this time, Bankman-Fried was in the Bahamas, which is where the company is (still) formally headquartered. Various sources estimated that between $1 billion and $2 billion worth of funds could not be found or accounted for.

The company filed for Chapter 15 bankruptcy on November 16, 2022. At that point, John J. Ray III, a veteran liquidator, was appointed as CEO of the company who, at that point, was struggling to stay afloat and avoid further legal troubles.

Reasons for the FTX Collapse

Shortly after taking over, Ray, the new CEO, made a statement suggesting, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

Most outside analysts have since held generally similar positions. At its face, the most obvious reason for the collapse of FTX was the illegal intermingling of funds between FTX and Alameda Research. The constant moving of funds from one account to another made it somewhat easier for both companies—both strongly connected to Bankman-Fried—to deceive investors, regulators, and depositors. Over time, this helped cultivate the approximately $2 billion “hole” the ultimately triggered the liquidity crisis.

Additionally, the firm’s financial recordkeeping has been called into question. Despite the fact that FTX was managing billions of dollars, the firm had almost no coherent accounting department and, in most cases, was using QuickBooks to keep track of its records. The lack of reliable recordkeeping helped make it much easier to conceal (whether deliberately or due to incompetence) the company’s assets and liabilities at any given point in time.

Furthermore, the deliberate misrepresentation of the company’s FDIC protections—which were non-existent—made matters even worse. Many depositors chose FTX instead of alternative exchanges because they believed that their deposits up to $250,000 would be protected. The FDIC cease and desist letter triggered the early withdrawal run, which compounded and made the already dire balance sheet situation even worse.

It is likely that the collapse of FTX in 2022 is something that business textbooks will discuss for decades. And as we will further explain below, the collapse of this exchange affected not only the most important stakeholders but also affected many industry-adjacent companies and organizations.

The Aftermath

The collapse of FTX triggered major losses in most other parts of the cryptocurrency industry. By the end of the month, Cronos (associated with Crypto.com) had lost upwards of $1 billion in value. Other enterprises, including Silvergate Bank, Genesis, Gemini, and more, also reported significant losses directly tied to the FTX collapse.

Some of the largest financial institutions in the world, including SoftBank, BlackRock, and Sequoia Capital, reported significant losses amounting to hundreds of millions each. Celebrity investors, including Shaquille O’Neal and Gisele Bundchen, recorded major losses and, in some cases, were even sued by investors.

Some of the largest financial institutions in the world, including SoftBank, BlackRock, and Sequoia Capital, reported significant losses amounting to hundreds of millions each. Celebrity investors, including Shaquille O’Neal and Gisele Bundchen, recorded major losses and, in some cases, were even sued by investors.

The cryptocurrency industry, in general, has faced an increased level of criticism and skepticism. Some major investors have decided to pull out of the industry altogether, noting that the returns generated by these sorts of funds are not worth the risk of investment. Others have called for a major overhaul or re-regulation of the industry as a whole.

To this day, FTX is still addressing a wide variety of new challenges, including attempts to collect on outstanding debts and court cases—some of which could result in up to 115 years of prison time for Bankman-Fried. The case is currently being tried by US Attorney Damian Williams (Southern District of New York), who has candidly described the FTX fiasco as perhaps the “biggest fraud in financial history.”

Timeline of Events Leading to the Collapse of FTX Exchange

This data table presents a concise timeline of events leading to the collapse of FTX Exchange. It highlights key moments, such as the founding of FTX, major funding, headquarters relocation, regulatory issues, liquidity crisis, bankruptcy filing, and the subsequent impact on the cryptocurrency industry. By examining this timeline, we gain insights into the sequence of events that contributed to the downfall of FTX Exchange.

Lessons to Learn from the FTX Collapse

There are a lot of lessons that can be learned about the FTX collapse of 2022. For individual investors, the most obvious lesson is: don’t invest in a product or platform you don’t truly understand. Even if it seems that a given deposit is ensured by the FDIC—which is a natural conclusion when the advertising suggests it—you should never assume that this coverage is guaranteed. Taking time to do some additional research can help you avoid future problems.

For firms and large-scale investors, the lessons are even more apparent. Demanding accurate, well-founded, and reviewed financial reports is an absolute necessity. The bookkeeping mistakes and omittances that occurred within the FTX financial department should have all been considered red flags.

In all cases, it is important to be careful when navigating lightly regulated markets. While some investors find the decentralized structure of the crypto market to be appealing, it also cultivates an investment environment where fraud is much more likely to occur.

Is Another FTX-Styled Collapse Likely to Happen?

It is impossible to say whether another collapse is likely to occur. Hopefully, some of these important lessons will have been learned and absorbed by the international financial community.