FTX crash: the effect its bankruptcy would have on cryptocurrencies

2022 looked set to be the best year of crypto entrepreneur Sam Bankman-Fried’s short life.

This son of Stanford professors turned 30 and the company he founded in 2019, FTX, a platform for buying and selling digital currencies, was among the biggest market leaders.

According to Forbes magazine, this year the fortune of this graduate of the Massachusetts Institute of Technology (MIT) reached US$24,000 million, almost tripling his fortune in 2021.

But almost from one second to the next, everything fell apart: his firm went bankrupt and Bankman-Fried resigned.

The FTX crisis has been compared by some experts to the collapse of the investment bank Lehman Brothers in the great crash of 2008 and many wonder if the firm’s nosedive could have a ripple effect throughout the cryptocurrency industry.

For now, bitcoin, the largest digital currency, has reached its lowest price since 2020 and like it, other cryptocurrencies have been dragged into a pit whose bottom remains uncertain.

Like a TV drama, frantic negotiations have erupted in recent days in which FTX’s biggest rival, Binance, publicly said it would bail out its competitor but, hours later, announced it would not buy the firm.

In the midst of the chaos, this Thursday Bankman-Fried himself came out to apologize on Twitter and acknowledged that he did things wrong.

“I was wrong. I should have done better,” he wrote.

Why did FTX go down? Following rumors that the company was short of liquidity, clients began making frantic withdrawals of hundreds of millions of dollars for fear of losing their funds.

According to Bloomberg Wealth, the firm is now worth less than $1 billion, a 94% drop in value in a single day.

FTX’s importance to the cryptocurrency industry is so great that investment bank JPMorgan Chase has warned that crypto markets could face a “cascade” of company bankruptcies.

The BBC tried to contact FTX but has not received a reply. A notice on its website read: “At this time, FTX is unable to process withdrawals. We strongly advise against making deposits.”

Experts are worried about what could happen, especially since the world of cryptocurrencies is going through a “crypto winter”, that is, a period of sustained low prices.

“This is a black swan event that adds more fear in the crypto world. This cold winter for cryptocurrencies now brings more fear,” Dan Ives, a senior equity analyst at Wedbush Securities, told the BBC.

US authorities are investigating the handling of the funds within FTX and other firms run by Bankman-Fried.

Bankman-Fried – who some went so far as to call the “Warren Buffet” of his generation – became “a beacon of hope for investors large and small,” Joe Tidy, a BBC technology analyst, said after prices of cryptocurrencies suffered precipitous falls at the beginning of the year.

“Over the past six months, the 30-something had provided generous bailout packages to struggling firms, secured lucrative acquisitions and given high-profile interviews.”

In several of them, including one with the American news portal Vox in March 2021, Bankman-Fried explained his vision: to get rich and then distribute the profits.

“If what you are trying to donate,” the crypto entrepreneur told Vox, “you should try to make as much as possible. [de dinero] you can, and donate as much as you can.”

This approach made Bankman-Fried one of the largest individual donors to US President Joe Biden’s campaign.

And it led him to cultivate a public image close to the idea of ​​Robin Hood.

For Joe Tidy, many of these interviews are costing him dearly in these difficult times, particularly with regard to the health of the virtual currency system.

“Now it looks like your company joins the growing list of cryptocurrency firms that have failed because of a recurring problem: lack of cash reserves.”

“FTX is not the first company to succumb to the so-called ‘crypto winter’ in which we find ourselves,” he concludes. “But it’s by far the biggest.”

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