Deep Troubles in the Crypto World

Cryptocurrencies, particularly Bitcoin, promised to finally give people an alternative to an otherwise highly centralized and controlled currency. Since the introduction of fiat currencies, money stopped deriving its value from a linkage to some metal with intrinsic value. Instead, it now derives its value from public faith in the sovereign. And this sovereign isn’t some altruistic charitable entity but rather a self-serving one that will continue to abuse this power of producing money. Bitcoin produced this alternative – a decentralised currency with a predetermined supply that cannot be changed without everyone agreeing. Its future is now being questioned by the collapse of FTX, which is the topic of this article.

FTX, a cryptocurrency exchange worth $32bn, has filed for bankruptcy, and its CEO Sam Bankman-Fried is currently being investigated by the U.S. Securities and Exchange Commission as well as the Department of Justice. This all started with Mr. Bankman-Fried's rise to fame in 2017, when he founded a crypto trading firm, Alameda Research, as well as FTX, a crypto exchange platform. In just three years, the platform became worth $32 billion, and he accumulated a net worth of $24 billion. He was known for aggressive market strategies, political lobbying, hosting conferences with Bill Clinton and Tony Blair and donations during times of trouble in the crypto world, handing out a $1 billion worth of bailouts.

“There are decades where nothing happens, and there are weeks where decades happen.” In a matter of 10 days, the $32bn exchange platform collapsed. It all started at the beginning of November when a report by CoinDesk showed that Bankman-Fried's trading company Alameda Research had $5 billion worth of FTT which is FTX exchange native currency supposedly created to ease trade. In addition, this trading firm's foundation was in FTT and not some fiat currency. This led to concern that Bankman-Fried had enormous leverage over value. To make matters worse, Binance, one of the biggest exchange platforms, said they would sell their FTT position worth $529 million. This led to a mass withdrawal worth $6 billion in a matter of days, which FTX didn’t have the liquidity to pay. As such, its CEO started seeking $8 billion bailouts to no avail, leading to bankruptcy and the resignation of Bankman-Fried. The CEO tweeted about the collapse, blaming “poor internal labeling" causing them to miscalculate leverage and liquidity.

This has been called the “2008 of the crypto worlds,” in which millions of retail investors' money was lost, reducing the value of many cryptocurrencies, and causing a surge in withdrawals. No one can calculate the consequences and magnitude of the shockwave this collapse will cause. However, the shape in which the crypto market finally emerges will reveal the resilience of the first natural experiment of its kind.