How the crypto landscape changed in a matter of days: the collapse of FTX.

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• The biggest shock of the year: FTX goes down.

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THE COLLAPSE OF FTX

Wow...

If you follow the crypto industry at all, your timeline and newsfeeds have probably been filled with stories and takes about the collapse of FTX over the last few days. And boy, did it happen fast.

If you don't follow the crypto industry, you're in the right place. We're breaking down what happened, what led to this, and what to look out for from here.

What happened?

Let's start with this Sunday, November 6th:

Popular crypto figurehead and leader of one of the largest crypto exchanges in the world - Changpeng "CZ" Zhao of Binance - tweeted that Binance was going to sell all of the FTT it had received from FTX for its equity stake in the business. All $580 million of it.

For those unfamiliar, FTT is FTX's native token, but more on that later. 

Binance was an early investor in FTX. But as FTX grew, they bought out Binance's stake to the tune of $2.1 billion as mentioned above.

In the tweet, CZ mentioned "recent revelations" that he didn't expand on in the thread but later followed up saying that Binance does not support "people who lobby against other industry players behind their backs." The "people" he was referring to is really just one person, Sam "SBF" Bankman-Fried, the founder and CEO of rival exchange FTX. SBF has been active in proposing regulations both online and in D.C. for the crypto industry. But many suspect that this was not the only thing that led to CZ announcing the sale of FTT (more on that later too).

At the time of CZ posting the above tweet, FTT's price was around $23. However, a sale of that magnitude began to spook investors and the price started to drop, just a little. That is until about 20 minutes later when Caroline Ellison, CEO of Alameda Research (a hedge fund/sister company of FTX that was also founded by SBF) tweeted at CZ that they would buy all of Binance's FTT supply at $22 per token.

Then on Monday, November 7th:

Traders began to worry. FTX was charging larger than normal sums for users to withdrawal funds from the platform, and some were even claiming their withdrawals were frozen. Obviously, with the collapse of other lending platforms like Celsius this year that froze withdrawals, this was not a good sign.

Beyond that, on-chain sleuths noticed that stablecoin reserves on FTX were dropping, ETH withdrawals were increasing, and FTX's main wallet balance was quickly dropping.

Then, in a since-deleted tweet, SBF claimed that "a competitor is trying to go after us with false rumors".

Then, radio silence. For almost 24 hours.

Yesterday, Tuesday, November 8th:

After waiting to hear what was next for withdrawals on the platform, SBF posted a tweet that shocked the crypto world. FTX was entering into a "strategic transaction" with Binance for FTX.com. Going on to say that customer withdrawals were going to be covered 1:1 with the help of Binance.

CZ cleared some things up on his own Twitter a few minutes later:

One of the biggest exchanges buying one of the other biggest exchanges after what was seemingly just a few tweets? Crazy. 

But even crazier is that the liquidity crisis for FTX was now confirmed. The FTT token that the exchange had issued to raise funds and give customers discounts was quickly dropping in price and fell to $3.15 by 2:30pm yesterday. Sell pressure had fully set in, and FTX's ability to cover customer deposits on the platform was decreasing.

As for the deal, the non-binding LOI part is important. This means that Binance has agreed to the transaction in principle but can back out if there's something they don't like.

Today, Wednesday, November 9th:

Coindesk reported this morning that Binance is "highly unlikely to go through" with the acquisition according to its source. This comes just one day after the deal was announced. So what did they see? How bad was it really?

Then, just 30 minutes ago, Binance confirmed it is backing out the deal:

 What will happen now?

Customers not being able to withdraw from FTX would send massive shockwaves through the crypto industry, and that possibility is already being reflected in prices. The entire global crypto market cap is down 7.5% in the last day alone. With some tokens, like Solana (one of Alameda's biggest holdings) down 40% in the last 24 hours.

So the question is...

What led to this?

Well, there's lots of speculation out there and we want to be careful. But some of the speculation has merit.

While the tweets didn't help, it certainly wasn't just some tweets from CZ. But remember those "recent revelations" he mentioned in the tweet he posted Sunday? Maybe there was something more than just competitor lobbying that led him to sell the FTT.

Coindesk released a report one week ago today about Alameda Research's balance sheet. In the report, they note that a large portion of its assets are comprised of FTX's FTT token, about $3.6 billion of the total $14.6 billion assets.

Normally, this wouldn't raise any eyebrows but remember that SBF is a founder of both FTX and Alameda. FTX created the FTT token to raise funds and give users who bought it discounts on trading fees, but here's where speculators get suspicious.

Since Alameda was an early purchaser of FTT, they reaped the run up in price. When showing investors those gains, they are able to get loans, using FTT as collateral. Even weirder is that some of the loans they got were from FTX directly, using FTT as collateral borrowing from FTX's customer deposits.

Dirty Bubble Media created this graphic to visualize:

Alameda CEO, Caroline Ellison has since refuted the report, claiming that the report is missing greater than $10 billion of assets on its balance sheet. However, any way you slice it, they still hold a lot of FTT.

What to look out for from here?

This isn't the first exchange to go belly up in crypto but it is certainly the largest. FTX was reportedly raising money at a $32 billion valuation earlier this year. Now, rumors are swirling that the acquisition offer from Binance was for $1. Not $1 billion. One. Dollar.

If the reports about Alameda are true, they could be facing a liquidity crisis of their own. We saw something similar earlier this year when Three Arrows Capital went under and a host of clients suffered in the aftermath. So who are Alameda's clients? We may be finding out in due time.

Another thing to look out for is regulations. As CZ pointed out in his most recent Twitter post "regulators will begin to scrutinize exchanges even more" to protect investors.

This is certainly the biggest shock of the year to date and the coming days, weeks, and months will be interesting to say the least. What you can be sure about, is we will be here in your inbox, giving you the breakdown every week.

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