FTX was one of the largest and fastest-growing crypto exchanges in the world, largely tapping into the crypto derivatives market. Before the collapse, it was the second-largest cryptocurrency exchange globally and, along with Binance, accounted for a majority of global cryptocurrency trades.
It counted major financial companies, including venture capital firm Sequoia Capital, amongst its investors. It was valued at a mammoth $32 billion in its latest funding round in January this year.
FTX founder Sam Bankman Freid was himself globally influential, given his outspokenness on the regulation of cryptocurrencies and his financial support of electoral candidates in the US.
FTX controversy explained
Thus, many are calling the FTX collapse, the “Lehman Brothers moment”, a reference to the crash of the fourth-largest American investment bank that triggered a domino effect that reverberated through the global economy, to become the worst financial crisis since the Great Depression.
While it is too soon to say whether this portends the death of cryptocurrencies, FTX’s fall from grace casts big doubts on an industry that has largely gone unregulated.
What are the events which led to the collapse of FTX?
The FTX collapse was triggered by the report by the cryptocurrency news platform CoinDesk. The report said that Alameda, a crypto hedge fund owned by FTX’s founder Sam Bankman Fried, held billions of dollars of FTX’s currency tokens – FTT.
Alameda was one of the main traders and market makers on FTX and the fund used FTT as a collateral to lend. The funds from Alameda were used to jack up prices of FTX and reports also began surfacing about fraud and misappropriation of investor money held at the exchange.
The issue was exacerbated by Changeng Zhao, the CEO of Binance, deciding to offload his company’s sizeable FTT holdings. That spooked investors, and as word spread, the token’s value cratered from $22 towards the beginning of November to $1.
This created a bank run amongst FTX customers, who started withdrawing funds, creating a liquidity crisis, until FTX declared bankruptcy on Friday.
How has the FTX collapse impacted prices of cryptocurrencies?
As of Tuesday, the market capitalisation for cryptocurrencies is down by 15 per cent at $887 billion and most cryptocurrencies are in the red. Bitcoin, the most popular cryptocurrency, is down by 17.9 per cent in one week, and Ethereum is down by 19.1 per cent.
Solana, which was considered the most promising cryptocurrency for the future, is now down by 95 per cent from its all-time high price reported on November 6. Tether, which is pegged to real-world investment and currencies, is the only coin that has maintained some stability during this crisis.
What are global investors’ primary concerns now?
Since FTX was a significant crypto exchange, and FTT was popular among investors, many people who had invested in the platform are staring at large losses.
Ikigai Asset Management, a California-based hedge fund, reported recently that most of its assets were locked in the FTX exchange. There are expectations that this collapse can have a cascading effect on the entire cryptocurrency ecosystem.
Regulatory scrutiny of private cryptocurrencies could also increase. Already, regulators worldwide are looking at the industry with renewed interest after the crisis.
How has the FTX episode impacted Indian investors and exchanges?
Trading volumes in Indian exchanges did shrink after the FTX collapse. However, on average, the spot trading numbers for November are similar to those reported for September and October before the FTX crash. Therefore, the impact on Indian exchanges has been minimal.
Experts do note that the FTX collapse will slow the recovery of the Indian crypto market, which has seen minimal trading for quite some time as a result of Indian tax rules. Many also argue that the FTX collapse could be the last straw for Indian crypto investors.