From a $32 billion valuation to a fire sale in 11 months: How FTX nosedived in spectacular fashion
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- The implosion of FTX has led to a sharp reversal in Sam Bankman-Fried's $15 billion crypto fortune.
- FTX is facing a liquidity crunch that could wipe out investors that include Tom Brady, Sequoia Capital, and Tiger Global.
- Here's how FTX went from a $32 billion company that was buying super bowl ads to worthless in less than a year.
About a year and a half ago, Sam Bankman-Fried's FTX crypto exchange bought the naming rights to the Miami Heat's sports stadium in Florida for $135 million.
Less than a year ago, FTX raised $400 million at a $32 billion valuation, was talking about a potential IPO, and secured Larry David to star in a Super Bowl commercial.
Two months ago, FTX was bailing out beleaguered crypto firms that went belly-up during the crypto meltdown, giving Bankman-Fried the reputation of a present-day John Pierpont Morgan that could backstop the crypto industry.
Today, it's nearly all gone in a spectacular collapse that will likely lead to more pain and result in a permanent scar on the face of the industry.
"Likely this ends up going through a long court process, and hopefully [clients] get as much back as possible, but right now we do not know what the size of the hole is," Invezz crypto analyst Dan Ashmore told Insider.
"We don't know what FTX did with client funds. FTX is not a bank. It should not be subject to a liquidity crisis. Assets shouldn't even be backed 1:1. Assets should just be…there. And once more, it's the retail investors who may pay the biggest price," Ashmore said.
The biggest implication though may be for the crypto industry as a whole, as the one firm (and billionaire) that was seen as a saivor for the industry and a potential backstop is now helpless. We're about to find out just how many crypto crashes investors can endure.
In the meantime, what just happened and how did we get here?
2017-2021: the golden era
Bankman-Fried started his career in 2014 as a trader at Jane Street Capital, a prop-trading firm that specializes in equities and is one of the world's largest market makers.
That experience helped inform Bankman-Fried's decision to start trading bitcoin from a quantitative perspective, as he exploited a time-zone arbitrage that allowed him to buy bitcoin in the US for one price, and then immediately sell it in Japan for a tidy 10% profit.
Through the formation of Alameda Research in November 2017, a quantitative crypto trading firm, Bankman-Fried would rinsed and repeat his trading strategy for years and ultimately generate billions of dollars in profits.
It's with those profits, and an investment from Changpeng "CZ" Zhao's Binance, that Bankman-Fried co-founded FTX in May 2019.
Bankman-Fried was at the right place at the right time, given that the total crypto market value ballooned from $200 billion in May 2019 to a record high of nearly $3 trillion at the end of 2021. The surge was aided by retail investors, as COVID-19 stimulus checks led to heavy speculative trading of digital tokens. This fueled FTX to grow its account base to more than 1 million.
The frenzy gave FTX the ability to raise $900 million from high-profile investors at an $18 billion valuation in July 2021. That was soon followed up by the firm raising $400 million at a $32 billion valuation in January 2022.
FTX investors include high-profile firms like Sequoia Capital, Softbank, Tiger Global Management, NFL star Tom Brady, and even the Ontario Teachers' Pension Plan. Their stakes could all soon be wiped out.
That's because it's a double-edged sword when riding the tailwinds of leverage and volatility to success: the downside can be steep and swift.
2022: crypto winter
Most cryptocurrencies peaked in late 2021, with bitcoin topping out at about $69,000 before sentiment started to crumble. A shift in market sentiment was imminent as investors began to face the music that the nearly two-year period of stimulus checks and 0% interest rates was about to end as the Fed set its focus on taming inflation.
As the sell-off spread to stocks in January 2022, crypto's decline only worsened. The entire market value of the crypto sector plunged about 50% from its November peak of $3 trillion to about $1.5 trillion in January. Today, the sector has a total market value of $831 billion, according to data from CoinMarketCap.
By mid-June, the drawdown in crypto extended to more than 70%. As Warren Buffett once famously said: "Only when the tide goes out do you discover who's been swimming naked."
The tide had just gone out.
May-September 2022: SBF smells opportunity in Terra implosion
An implosion in crypto tokens including luna, terraUST, and celsius erased tens of billions of dollars and highlighted to investors just how much leverage is being used by many in the industry to juice returns.
And ultimately that leverage helped contribute to failures and bankruptcies at different crypto firms including Three Arrows Capital, Voyager, BlockFi, and Celsius, among others.
Bankman-Fried's first big pounce amid the crypto meltdown was on BlockFi, as FTX signed a deal with the troubled lender to have an option to buy the company for $240 million and provide it with a $400 million revolving credit facility to help resolve a liquidity crunch.
FTX also acquired Canadian trading platform Bitvo, and won the assets of brokerage Voyager Digital from bankruptcy court, paying about $1.4 billion. These purchases by FTX help shore up confidence and stabilize a jiterry market.
August-October 2022: regulators start poking around
High profile departures from Alameda Research (co-CEO Sam Trabucco) and FTX (president Brett Harrison) are seen as sudden by the market, but manageable.
Harrison's departure came after he wrongly tweeted that FTX accounts had FDIC insurance. That led to a cease-and-desist letter from the Federal Deposit Insurance Corporation, accusing the company of making false and misleading representations. The company walked back their claims.
In October, Texas state regulators launched an investigation into 8% yield accounts offered by FTX, claiming that they are actually unregistered securities that run afoul of security regulations.
November 2022: FTX unravels at the speed of light
The crescendo of this week's FTX implosion began with a report from CoinDesk, which found that the balance sheet of Alameda was comprised of billions of dollars worth of FTX's own native token, FTT, and that it overstated its value.
That report scared one of FTX's first investors: Binance. The rival crypto exchange had divested of its FTX equity stake in 2021, but it received half of its payout from FTX in FTT tokens, and it held onto them.
Binance began to liquidate its FTT tokens, basically leading to "run on the bank" for FTX, with withdrawals piling up and the FTT token plunging more than 80%. Of course, that sent shockwaves through Alameda Research as well, and speculation continues to mount about the leverage both companies may have had on the book.
Within a day of the collapse, a surprise tweet from CZ of Binance announced it had signed a non-binding letter of intent to acquire FTX. That deal fell apart a day later as Binance walked away after being unimpressed with its due diligence of the company.
Now, the fallout continues, and the markets is still in the thick of it. Unconfirmed reports are circulating of the misuse of customer funds, a $6 billion funding shortfall, and that FTX had initially went to Wall Street for a $1 billion bailout.
The SEC and CFTC has launched investigations into the company, and the biggest concern is what happens to customers funds on the platform. If this goes to bankruptcy court, things could get uglier still.
Stay tuned.
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