Why are cryptocurrencies falling? FTX crash explained

Cryptocurrencies have seen significant declines in recent days, and the event that triggered the massive sell-off in these assets was the stunning collapse of the FTX platform. Sam Bankman-Fried (SBF), one of the company’s co-founders, lost almost his entire fortune in one day.

FTX was until recently one of the largest cryptocurrency trading platforms in the world. The company seemed very stable during the “crypto winter”, especially as it played the role of a “knight” who rescued several failing firms. In total, FTX made 15 acquisitions during this tough period for virtual currencies.

Moreover, the startup has sponsored major sports teams and events, including the Mercedes-AMG Petronas Formula 1 organization and the Super Bowl.

The FTX logo emblazoned on the Mercedes-AMG Petronas F1 team’s racing car.

Founded in 2019, the company has caught a massive cryptocurrency growth wave, which peaked in October 2021, when a Bitcoin was worth $67,000.

One of the first institutional investors in FTX was Binance, today the world’s largest crypto trading platform. Bankman-Fried’s firm grew extremely quickly and reached revenues of $1.2 billion in just two years. Following its most recent investment round earlier this year, the startup was valued at $32 billion. FTX has seen big investments from stars including sports star Tom Brady and his ex-wife, model Gisele Bündchen.

FTX
Tom Brady and Gisele Bundchen (Photo: Profimedia Images)

FTX seemed unstoppable, and SBF became the world’s richest man under 30, with an estimated fortune of $26.5 billion. The entrepreneur announced that he would donate 99% of his wealth, as Chuck Feeney did. He has declared himself a believer in “effective altruism”, a social movement and philosophy that focuses on the idea of doing as much good as possible for as many people as possible.

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Also read: Top 5: Cryptocurrencies that pollute the environment the most

The entrepreneur has another important business that plays a big role in this incident. It’s an investment vehicle (sort of like a crypto hedge fund) called Alameda Research, opened before FTX was founded.

The incident that triggered the decline

When it exited the FTX deal in 2021, Binance received FTTand BUSD cryptocurrencies (tokens issued by SBF’s platform) worth about $2.1 billion in exchange for its stake.

Binance decided to sell these virtual currencies after reports surfaced in the press that Sam Bankman-Fried had used billions of dollars of FTX funds to cover the needs of his other firm, Alameda Research. The investment fund reportedly had $6 billion worth of FTT tokens in total assets worth $14.6 billion.

Binance chief Changpeng Zhao (CZ) was also reportedly annoyed by some of the proposals for crypto market regulation made by the SBF. CZ publicly announced on Twitter Binance’s intention to liquidate the FTT position it held.

This announcement triggered massive selling of FTT cryptocurrencies and price collapse. SBF lost 94% of its wealth in a single day, and FTX ran out of liquidity. As we know, liquidity in financial systems is like oil in an engine: without it the system seizes up.

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Binance also wanted to jump to FTX’s aid, buying much of the Bankman-Fried-run firm. But just a day later, the CZ-led company said it would not do so because it discovered problems in the administration of FTX funds and that the startup was being investigated by several government agencies.

Zhao told Binance employees that he did not plan to destroy FTX. According to him, the incident “is not good for anyone in the industry.”

At the moment, FTX is scrambling to find about $8 billion in funds it needs to avoid bankruptcy.

Analysts say the rapid collapse of one of the biggest names in the market will remain a visible “scar” on the face of the crypto industry, but that this event will not lead to the demise of cryptocurrencies.

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