FTX Crash: What Investors Need to Know

FTX, a major cryptocurrency Exchange and FTX.US, its U.S. subsidiary, have filed for Chapter 11 bankruptcy, the company announced on Friday. Founder and CEO Sam Bankman-Fried has stepped down, the statement said; the new CEO is John J. Ray III, who steered infamous energy giant Enron through its bankruptcy and liquidation process some two decades earlier.

The exchanges collapsed amid liquidity problems and allegations of embezzlement, followed by a large volume of withdrawals from shaken investors. The value of FTX’s native token, FTT, has plummeted, taking with it other coins including Ethereum and Bitcoinwhich hit a two-year low on Wednesday afternoon.

The impact of the FTX crash could have broad implications across the entire crypto market, as cryptocurrencies and exchanges exposed to FTT or FTX could face lower prices and financial issues.

Here’s what this week’s events mean for major exchanges, US investors, and future crypto regulations.

These are the key points:

  • FTX is a cryptocurrency exchange founded by Sam Bankman-Fried in 2019, who served as CEO until Friday. The exchange issues its own token, FTT, and was the fourth largest crypto exchange by volume as of Tuesday.

  • Bankman-Fried also founded a crypto trading company called Alameda Research; CoinDesk reported on Alameda’s troubled balance sheet on November 2. Its top assets, according to the report, are worth billions of FTT dollars.

  • Changpeng Zhao, CEO of rival exchange Binance, tweeted on Sunday that he plans to sell Binance’s FTT stock due to “recent revelations that have come to light”, referring to the Nov. 2 CoinDesk report on fuzzy funds from FTX and Alameda. He compared FTX’s situation to that of TerraUSD and LUNA crash this year, which sent the crypto market plummeting and cost investors billions of dollars. But generally, these moves are not publicly announced.

  • Zhao’s announcement caused FTT’s value to decline rapidly the next day, as suspicions grew that FTX lacked the cash to sustain trades and stay afloat. The value of other coins – including BTC and ETH – also fell, with Bitcoin falling to its lowest level in two years. Bankman-Fried said in a tweet on Thursday that the platform saw $5 billion in withdrawals on Sunday.

  • Zhao and Bankman-Fried have reached an agreement for Binance to acquire the non-US arm of FTX. The exchange’s CEOs signed a non-binding letter of intent on Tuesday, essentially promising to bail out the failing exchange to avoid a bigger stock market crash.

  • Binance pulled out of the deal. Within a day, Zhao posted on Twitter that Binance had completed its “corporate due diligence” and said it would not acquire FTX. Zhao tweeted that reports of “mismanaged client funds” and “alleged investigations by US agencies” contributed to his decision. Bankman-Fried appeared to reference Zhao’s influence on FTX’s downfall in a cryptic Twitter post where he said, “Well done; you won.”

  • On Tuesday, FTX shut down everything non-fiat customer withdrawals. On Twitter, Bankman-Fried posted a series of apologies explaining FTX’s liquidity issues and promising more transparency.

  • Bankman-Fried told investors that Alameda owes FTX about $10 billion, that FTX lent to Alameda using customer deposits, according to a recent Wall Street Journal report. But before making the loan, FTX only had $16 billion in assets, according to the report, meaning it loaned out more than half of its assets.

  • On Thursday, FTX.US posted a warning on its website for users on the login screen, noting that trading “may be halted on FTX US in the coming days.” The message told users to close any positions they wanted and that withdrawals would remain open.

  • On Friday, FTX announced that it had filed for voluntary Chapter 11 bankruptcy for FTX, FTX.US and Alameda. Chapter 11 bankruptcy allows businesses to restructure debt and continue operations, unlike Chapter 7 bankruptcy, where assets are liquidated.

  • FTX.US also froze withdrawals on Friday, following the bankruptcy announcement, despite earlier assurances that FTX.US was unaffected by FTX’s liquidity issues.

  • FTX and FTX.US wallets were emptied Friday night in an apparent hack. Over $600 million was drained from wallets, CoinDesk reported. FTX posted an article about the hack on its support channel, instant messaging service Telegram, saying, “FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t do not go to the FTX site because it may download Trojans.” Trojans are malicious software disguised as legitimate software.

  • FTX General Counsel Ryne Miller posted on Twitter the same evening that the company would expedite the movement of remaining assets to cold storage. – i.e. offline – because of “unauthorized transactions”, referring to the apparent hacking.

What does this mean for US customers?

FTX’s Chapter 11 bankruptcy filing included FTX.US, according to the press release. The companies aim to “maximize recoveries for stakeholders,” Ray, the new CEO, said in the statement. But at the time of publication, guidance for affected investors was not available.

Several users reported that their wallets had been emptied on Friday evening, following the apparent hack. Earlier today, FTX.US froze consumer withdrawals.

The bankruptcy filing contrasts sharply with Bankman-Fried’s previous statements. Earlier this week, he pointed out that the liquidity issues relate to FTX International, not FTX.US, the US arm of the exchange, which is subject to more regulation. Bankman-Fried tweeted Thursday that the FTX.US exchange is “100% liquid,” meaning users could withdraw all of their invested funds in full.

What does this mean for the US crypto market?

FTX’s issues have had a profound effect on the US crypto market:

  • Bitcoin’s price fell below $16,000 on Wednesday.

  • Ethereum fell below $1,100 on Wednesday.

  • Solana fell below $13 on Wednesday after CoinDesk reported that Alameda held a large amount of it.

  • Tether briefly broke away from the US dollar, falling 3% on Thursday.

Cryptocurrency is a relatively risky investment and should be treated accordingly. High-risk investments should make up a small part of your overall portfolio, and diversifying the range of cryptocurrencies you buy can help minimize risk.

I’m afraid to keep my crypto with an exchange. What should I do?

Consider moving your digital assets to another crypto wallet. Most exchanges allow you to transfer assets to these wallets, which can be online (on a separate platform) or offline (on a USB stick with additional security features).

Which exchanges are exposed to the FTX crisis?

With such high volatility and so many clients unable to withdraw their funds from FTX, investors are concerned about the fate of their assets on other exchanges. Here is how the main exchanges are affected:

  • FTX and FTX.US froze the withdrawals and filed for Chapter 11 bankruptcy. FTX is regulated by the Securities and Exchange Commission, or SEC, and the Commodity Futures Trading Commission for its handling of client funds, Reuters reported. The investigation began several months ago. FTX did not respond to NerdWallet’s request for comment.

  • BlockFi froze withdrawals. The company said in a post on Twitter that it learned about the news from FTX via Twitter and, due to the lack of clarity, would not be able to operate as usual. Previously, FTX was to acquire BlockFi, and FTX.US granted BlockFi a $400 million line of credit.

  • Binance.US, Binance’s US arm, which is operated separately, posted on Twitter that Binance’s relationship with FTX will not affect US users.

  • Coinbase CEO Brian Armstrong tweeted that the platform has no material exposure to FTX, FTT or Alameda.

  • Gemini Co-founder Cameron Winklevoss tweeted that the platform has no material exposure to FTX, FTT or Alameda.

  • Robin Hood told NerdWallet that the service has no direct exposure to Alameda, FTX or any of its entities. FTT cannot be traded on the platform. FTX’s Bankman-Fried owns a 7.6% stake in Robinhood.

  • EToro told NerdWallet that the platform has no corporate exposure to FTX or FTT. Users can trade FTT on EToro, although this does not apply to US users.

  • kraken told CoinDesk that the platform has no physical exposure to FTX or Alameda and does not support FTT trading.

  • Crypto.com CEO Kris Marszalek tweeted that the company’s direct exposure to the “FTX collapse” is “immaterial”, amounting to less than $10 million in the company’s capital. The platform suspended withdrawals of USD and USDT stablecoins on the Solana network but did not explain why.

How will this affect crypto regulation?

US exchanges are subject to more regulation and reserve requirements than international exchanges. But recent events could prompt further regulatory scrutiny. In a Twitter post Wednesday, Sen. Elizabeth Warren, D-Mass., called for more aggressive enforcement and said she was pushing the SEC to protect consumers.

Neither the author nor the publisher held a position in the aforementioned investments at the time of publication.

Robert D. Coleman