'I'm Sorry. That's The Biggest Thing.' Sam Bankman-Fried and Cryptoworld Lose Big in FTX Meltdown, Company Files For Bankruptcy. Binance said Wednesday it would not purchase FTX in a debacle that has shocked crypto world and driven down the price of Bitcoin. On Friday, FTX announced it filed for bankruptcy. Here's how it all went down.
By Gabrielle Bienasz •
Opinions expressed by Entrepreneur contributors are their own.
People are losing money — and faith — with crypto.
Sam Bankman-Fried, the previously lauded billionaire and CEO of cryptocurrency exchange FTX, saw his fortune and confidence in his platform tumble after a CoinDesk article revealed that a company he also owned was heavily dependent on an asset without independent value, leading to panic from FTX customers and in the crypto world, in general, this week.
By Friday morning, the company had announced that it would be filing for Chapter 11 bankruptcy in order to "maximize recoveries for stakeholders," the company's new CEO, John J. Ray III, who appears to have been affiliated with GreyLock Partners, a VC firm per SEC Documents, said in the release. (He is not currently on the company's website.)
Bankman-Fried will step down but stick around to help with the transition. It will affect 130 companies affiliated with FTX with a few excluded.
Press Release pic.twitter.com/rgxq3QSBqm
— FTX (@FTX_Official) November 11, 2022
One fear that could be sorted out during bankruptcy proceedings is that FTX was not solvent, i.e., that customers would not be able to actually withdraw their coins from the platform. The CEO Bankman-Fried earlier denied these rumors on Monday in a now-deleted Tweet and has said online the company's users in the U.S. need not worry about the liquidity of their assets.
In a surprising series of events this week, a competing company, Binance, moved to rescue FTX on Tuesday by buying it — but had backed out by Wednesday, after its due diligence process and because of concerns FTX was being investigated by government authorities.
"In the beginning, our hope was to be able to support FTX's customers to provide liquidity, but the issues are beyond our control or ability to help," the company wrote.
FTX also announced Thursday it had partnered with Tron to help users access assets, and the company has been further Tweeted about various withdrawal-related steps it's taking with foreign regulators including in The Bahamas and Japan. In the comments, seeming users express frustration and confusion.
On Thursday morning, FTX CEO also Bankman-Fried apologized for and explained his take on the situation in a long Twitter thread, saying he made mistakes with liquidity that affects, he claimed, just users of FTX International, and that he planned to spend the week raising money to be able to cover user deposits.
"Anyway: right now, my #1 priority--by far--is doing right by users," he wrote. "So, right now, we're spending the week doing everything we can to raise liquidity…. There are a number of players who we are in talks with."
Whether or not that is the true scope of the problem or if FTX will be able to provide for its users through bankruptcy proceedings remains to be seen. Bankman-Fried previously told investors he needs $8 billion to cover a "bank run" on the platform.
The saga has been a bucket of cold water for crypto investors, says micro crypto influencer and longtime token-holder in the space, Tiffany Fong.
"It is shocking to see a company a lot of us looked at a hopeful and optimistic way have such issues and have such an illiquid balance sheet," she said.
The anxiety inherent to the FTX episode can be traced back to the fall of fellow crypto exchange Celsius, which filed for bankruptcy in July, trapping the assets of its users, and the general decline of the value of cryptocurrency, which has been hammered by the instability of the wider economic environment. Bitcoin, a flagship coin, for example, has dropped 18% since the beginning of the FTX saga last week and has lost 65% of its value since the beginning of this year.
What's going on with FTX?
FTX and Binance are both cryptocurrency exchanges. You can use them to swap a coin from one currency to another. Both also offer other types of products, like leveraged tokens, which are theoretically less risky crypto assets. Prior to Binance's plan to buy the company, the companies were thought to be rivals.
Then, things started to get bad for FTX. Last week, CoinDesk published a story that noted a company very closely linked to FTX, Alameda Research, which is Bankman-Fried's research firm, (it is like a crypto hedge fund of sorts that trades crypto assets on a larger scale and is not accessible to everyday retail investors) had a very large portion of its assets as the cryptocurrency coin FTX itself had created, called FTT. (Alameda is also part of the bankruptcy proceedings.)
There's nothing "wrong" with that, as CoinDesk noted, but it's as if all of your wealth is based on an asset (or, at least based on the documents the outlet had access to) that only has value because you say it does, as opposed to something with objective value on the market.
This spooked people. Fong said she had started to hear rumors on Twitter of the platform's insolvency even before the article came out — and then, after the CoinDesk piece, Binance announced Sunday it would sell all of its FTT. Customers then began withdrawing money from FTX and people began to sell FTT, further driving down the price of FTT — and, theoretically, the value of Alameda.
Then, in an angel moment, rival trading platform Binance swooped in, and the two company leaders, Bankman-Fried and Binance CEO Changpeng "CZ" Zhao Tweeted Tuesday they had signed a non-binding letter of intent for Binance to acquire FTX.
CoinDesk then reported Wednesday, citing an anonymous source, said Binance was considering ditching the acquisition after getting a look at the company's financials, which Binance later that day confirmed in its own Tweet. None of this bodes particularly well for people involved in FTX.
None of this week's events bode particularly well for people involved in FTX. Bankman-Fried lost almost 94% of his fortune, some $14 billion, because of the debacle. Tom Brady publicly invested in FTX and was an influencer for the company, so the money he has put into the platform is also at risk, per Yahoo Finance.
It's unclear how much Brady and his now ex-wife Gisele Bündchen, who also signed an endorsement deal with the company, sunk into FTX or how much they might have lost.
BREAKING: Crypto exchange FTX has announced an endorsement deal with Tom Brady & Gisele Bündchen.
— Joe Pompliano (@JoePompliano) June 29, 2021
Both Brady & Bündchen will receive equity in FTX and a signing bonus in crypto.
In total, FTX has committed to spending over $350M on sports partnerships in the last 6 months alone
Previously, FTX and Bankman-Fried were seen as the "white knights," as Fong put it, as Bankman-Fried had dived to rescue via buying struggling competitor Voyager Digital. So, finding out FTX needed rescuing was disturbing, she added.
It is possible Brady and Bündchen could even face questions about how much they knew about shaky business foundations, as crypto-astrologer-influencer Maren Altman has about Celsius.
More official sources appear to be poking around as well. Bloomberg Law reported Wednesday that two U.S. government entities, the Securities and Exchange Commission and the Commodity Futures Trading Commission, are looking into FTX over questions about its liquidity.
In Bankman-Fried's Twitter thread on Thursday, he explained how he miscalculated the platform's liquidity. He also said his crypto trading fund, Alameda Research, would be "winding down."
6) My sense before:
— SBF (@SBF_FTX) November 10, 2022
Leverage: 0x
USD liquidity ready to deliver: 24x average daily withdrawals
Actual:
Leverage: 1.7x
Liquidity: 0.8x Sunday's withdrawals
Because, of course, when it rains, it pours. We saw roughly $5b of withdrawals on Sunday--the largest by a huge margin.
"And so we are where we are. Which sucks, and that's on me. I'm sorry," he wrote. Crypto entrepreneur and "whiz kid" Justin Sun has also said he's working with the platform trying to help solve the issue.
No matter what happens, it has been a tough time for Fong, despite her longtime love for decentralized finance. Although she did not have any significant coins in FTX, Fong lost about $200,000 in the Celsius debacle, and that, combined with the FTX drama, has her questioning her confidence in some of the currencies.
After this, "people [are] losing faith in crypto as a whole," she said.
