On November 11th, one week ago, cryptocurrency giant FTX declared bankruptcy. FTX was one of the largest digital exchanges, and contained assets allegedly up to $8 billion. In the span of four years, FTX rose to economic prominency.
So, why did it fall?
Before we answer that question, let’s go back.
The year was 2018, two years before the great pandemic. FTX was founded as a “digital currency exchange.” Its mode of business was providing a platform for people to buy and sell cryptocurrency. Cryptocurrency, in essence, like stocks. Both are intangible sources of capital that can be bought and sold, and can often be worth a great deal of money. The biggest difference, though, is that while stock trading can be relatively safe (though not anywhere near always), cryptocurrency is extremely volatile and has no value outside what we give it. It’s sort of made-up money that people place value in, so it has no stable rate like government-sponsored currency. Bitcoin is a key example of this market, and it has achieved significant success as of late - in 2021, it was valued at 64,000 US dollars.
This was the world in which FTX was born.
Founded by Sam Bankman-Fried, FTX quickly became successful due to what NBC describes as “a series of high-profile acquisitions, aggressive marketing strategies and low trading fees.” They created their own cryptocurrency to rival Bitcoin, known as FTT. The fact that their logo became the “first-ever umpire uniform patch partner” didn’t hurt either.
Then the red flags began to appear, starting with Bitcoin’s sudden decline after their peak value of $64,000. It now trades at only $10,000. Other cryptocurrencies, including FTT, began to follow suit. Most worrying of all was that a leak of documents showed Alameda Research, a crypto investing company owned by Bankman-Fried, held a considerable number of FTTs. This meant, if the FTT’s value declined, so too would Alameda. Then, Alameda reacted to the leak in the worst possible way:
They announced they would be selling their FTT cryptocurrency.
This caused a digital “bank run,” with investors scrambling to dump off their cryptocurrency. The FTT value collapsed, and so too did FTX. It wouldn’t be long before FTX announced bankruptcy.
Now, here’s another question: is it over for crypto?
We have no real answer yet. In the coming days and months we’ll see the path of digital currency from here. Bitcoin is still in decline, though.
With FTT only valued at about a dollar, I wouldn’t get my hopes up.
The Fall of Crypto?
Nice work. Crypto is a complicated concept - but you managed to talk about it very clearly. Great newsletter!