tldr FTX fiasco: a chronological explanation from the set up to the fall
tldr FTX fiasco: a chronological explanation from the set up to the fall
→ Is for clarifications and speculations (as of date of publication, most of the truth is still unknown. Sources are linked, many of which are speculative (i.e. Twitter)
The Set Up
2017 - SBF leaves Jane Street to found Alameda Research, a crypto trading firm
2019 - SBF founds FTX, a crypto exchange that rapidly becomes one of the largest in the world
→ People speculate throughout 2021-2022, FTX excessively spent on i.e. advertising and real estate, invested in illiquid assets like VC deals, Alameda Research lost money in the bear market, both took on lots of leverage collateralized by its own token and tokens SBF promoted (FTT, SOL, SRM), and had poor accounting and risk-management practices, leading to a generally precarious financial situation
Oct 2021 - FTX buys out Binance’s initial investment, by Nov 2022, Binance owns ~$500M of FTT from this transaction
→ FTT is a token issued by FTX
May 2022 - Terra’s stablecoin UST depegs, causing a downward spiral where UST ($18B) and Luna (~$1B) effectively go to 0. General crypto prices fall in the aftermath
June 2022 - 3AC (a hedge fund once with $10B of assets) crashes due to its leveraged investments in Luna and crypto
→ The people who lent to 3AC asked for their money back, 3AC didn’t have it because the value of their assets collapsed. Those creditors who 3AC owed money to now have less assets relative to their liabilities, many will go on to collapse i.e. Blockfi and Voyager. Notably, Alameda lent money to many of these creditors (and hence now have less assets relative to liabilities)
→ As these creditors are forced to liquidate, they have to sell tokens (including FTT), creating downward price pressure
July - Sept 2022 - FTX decides to buy Blockfi and Voyager
→ In hindsight, people speculate it was to avoid the downward price pressure on FTT, which would increase FTX’s own gap between assets and liabilities, and to increase their assets using Blockfi and Voyager’s user deposits
Sept 28 2022 - ~$4B of FTT was sent to Alameda research and back to FTX
→ This is important! Post-Alameda’s 3AC collapse woes, people suspect SBF decided between letting Alameda get liquidated, or save it via FTX. (It’s possible funds were cross used way before this incident as well.) This movement on chain is suspected to be repayment by Alameda for FTX bailing them out, and Alameda executives are believed to have admitted that customer deposits from FTX were used for this bailout
The Fall
Nov 2nd 2022 - CoinDesk writes an article based on a leaked balance sheet for Alameda revealing much of its reserves were FTT
→ This confirms long-standing rumours that Alameda and FTX have a very close relationship (which is a conflict of interest for a long list of reasons)
Nov 6th 2022 - CZ, the founder of Binance, tweets that they intend to sell the FTT they own, this creates downward price pressure on FTT
→ People panic, why? Let’s say FTX has $100 FTT (assets) and borrows $100 USD off that FTT (they are collateralizing the loan 1:1), if the price of FTT drops in half, FTX now owes $50, creating a hole in the balance sheet. Thus, users rapidly try to withdraw, aka it’s a bank run
Nov 7th 2022 - SBF tweets “FTX is fine. Assets are fine” they were not fine
Nov 8th 2022 - CZ and SBF both tweet that Binance signed a non-binding LOI to acquire FTX (pending due diligence). CZ says this is due to a “significant liquidity crunch” (aka they owe more than they own)
→ People think this is a weird move by SBF, because in FTX International’s terms of service, they say no customer deposits can be owned by and therefore loaned by FTX. So in the worst case scenario, if 100% of users want to withdraw their money, they should be able to
→ If Binance acquired FTX, they would likely just take on the liabilities (and customer deposits would be ok). So the $32B of equity value is effectively $0 at this point
Nov 9th 2022 - Within 1 day of doing diligence, Binance decides to not acquire FTX, because it’s “beyond [Binance’s] control or ability to help” and references news reports of “misuse user funds” (remember, customer funds weren’t supposed to be touched re: terms of service)
→ FTT Nov 2nd price: ~$25, FTT November 9th price: <$3. Other coins SBF supported (and held by FTX) such as Solana and Serum crashes from ~$31 to ~$14 and ~$0.7 to ~$3 respectively. FTX’s “hole in the balance sheet” is getting larger by the minute, and reportedly >$8B
→ Up until this point, people think this might’ve been a business plot by CZ. Hour by hour, this seems less plausible as the FTX woes are much deeper
Nov 11 2022 - FTX International, FTX US, and Alameda all file for Chapter 11 bankruptcy and SBF resigns. And ~$500M is stolen in an apparent hack, which may have been the Bahamian government seizing assets (where FTX was domiciled)
Nov 12 2022 - WSJ reports SBF used a “backdoor” (without alerting internal or external compliance systems) to move $10B of customer funds to help cover liabilities at Alameda Research, leaving FTX highly vulnerable in the case of a bank run
→ From the ongoing bankruptcy documents, it’s unfolding how deep mismanagement of funds and of the company ran (i.e. was customer funds just used post-Terra/3AC crash, or was it dipped into much earlier, does anyone even know because of terrible bookkeeping?) Intention is also highly speculation, at best this was two very poorly risk-managed and poorly run organizations, at worst there was highly fraudulent intent
The day you’re reading this - so what happens now?
1) if a company is being fraudulent, it should go down as quickly as possible, that’s the positive.
2) there’s going to be “contagion” - for example, there are:
Possibly up to 1M creditors who lent money to FTX which is now stuck or lost
Creditors who lent money to creditors who lent money to FTX who may now be short (and repeat)
Assets that FTX held will get liquidated in the bankruptcy proceedings, creating downward price pressure
Companies who were taking out loans on the above assets who now have more liabilities than assets (and repeat)
Companies that were in the process of being “saved” by FTX
Funds and companies who held their treasuries and/or customer assets on FTX
Tokens who were backed by FTX, there are tokens whose market making was done by Alameda
And there is of course the immeasurable loss to employees who trusted SBF, normal people who have lost savings, and non-fraudulent people in crypto who feel embarrassed and ashamed and will be punished by vague association.
*as you can imagine, there is a lot of drama/gossip about the people involved - i.e. SBF’s personal beliefs and his inner circle, I’ve left this out for clarity*
