The FTX meltdown, explained

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FTX, one of the world’s largest cryptocurrency exchanges, filed for Chapter 11 bankruptcy protection on Friday, and CEO Sam Bankman-Fried resigned. The exchange crashed amid a liquidity crunch and allegations of misused funds, followed by a large volume of customer withdrawals. A bailout by Binance was possible, but the deal fell through because of FTX’s troubled finances.

 

The rapid downfall of FTX has shocked the financial industry, as the company was a leading player in crypto. FTX’s crash could have wide-reaching implications throughout the crypto market because cryptocurrencies and exchanges with exposure to FTX could face financial troubles in the weeks and months ahead. The details of the fall of FTX are still being revealed, but here is a brief overview of the FTX collapse.

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What Is FTX?

FTX is a cryptocurrency exchange, meaning that it allows customers to store and trade cryptocurrencies with their fiat currency or to trade different cryptocurrencies for one another on its platform. Sam Bankman-Fried, popularly known as SBF, founded FTX in 2019 and operated the company in the Bahamas. Notably, Bankman-Fried also founded and operated a crypto trading firm called Alameda Research.

 

Before filing for bankruptcy protection, FTX was one of the world’s most prominent crypto exchanges, along with Binance, Coinbase, Kraken, KuCoin, and Bitfinex.

 

Though it offered spot market trading of cryptocurrencies, FTX specialized in crypto derivatives and leverage products, such as options, futures, and leverage tokens.

 

Since its founding, FTX has also been one of the most visible crypto companies. It is known for its Super Bowl ads featuring NFL star Tom Brady and comedian Larry David, for purchasing the naming rights for the Miami Heat’s basketball arena in Miami-Dade County, and its partnership with Major League Baseball to place the FTX logo on the uniforms of umpires.

What Happened?

FTX’s fall from a significant player in the crypto industry to bankruptcy seemed to occur quickly. The heart of the matter surrounds the relationship between FTX and Alameda Research. FTX and Alameda were supposed to be separate businesses, but they reportedly had close financial ties that raised alarms.

 

According to a November 2 report by CoinDesk, FTX’s partner firm Alameda Research had a troubled balance sheet, including holding a significant portion of its assets in FTX’s native token, FTT. This report caused some investors to question the relationship between FTX and Alameda and whether the money held in FTX was safe.

 

A few days later, on November 6, Changpeng Zhao, CEO of the world’s largest crypto exchange Binance, tweeted that the firm planned to sell its holdings of FTT supposedly because of the blurred relationship between FTX and Alameda.

 

This announcement spurred a wave of selling of FTT, causing the price of FTT to crash. Additionally, FTX customers withdrew approximately $6 billion from the exchange over three days, suspecting that the company didn’t have the liquidity to stay afloat. In response, FTX halted customer withdrawals.

 

On November 8, Zhao announced Binance had entered into a non-binding agreement to purchase FTX, a move to bail out the troubled crypto exchange facing a liquidity crisis. However, Zhao backed out of the deal after Binance looked at FTX’s finances. Zhao cited “mishandled customer funds and US agency investigations” as reasons to back out of the agreement.

 

The sudden collapse of the deal essentially forced FTX and Alameda Research to file for bankruptcy. The company had an $8 billion shortfall without an investor to bail the company out.

Who Is Affected?

FTX has many creditors; according to one report, the company owes money to more than one million individuals and organizations. During bankruptcy proceedings, the creditors would be the first to receive whatever assets a bankruptcy judge says is appropriate to distribute.

 

FTX investors, which include several venture capital firms and institutional investors, would be next in line to recoup funds during bankruptcy proceedings. Several institutional investors are set to lose their investments in FTX, notably Sequoia Capital, which wrote down its equity in FTX from $210 million to $0.

 

For customers who use FTX and need access to their holdings, it could be years until they can get anything back from FTX. And even if customers are lucky enough to recover some funds, it is unclear how much they would get back.

 

To make matters worse, at least $1 billion of client funds are missing at FTX, and a hack drained more than $600 million from wallets after the company declared bankruptcy.

 

The failure of FTX has also caused issues with other companies in the crypto industry. BlockFi, a crypto lender with ties to FTX, paused customer withdrawals last week and will likely file for bankruptcy.

 

Additionally, the lending arm of Genesis Global Trading, a crypto investment bank, announced that it was suspending redemptions and new loan originations because of the crypto market volatility in the wake of the FTX bankruptcy. The turmoil at Genesis spilled out to other crypto firms, including crypto exchange Gemini Trust Company, which paused withdrawals on its lending platform because of a liquidity crunch.

What Happens Next?

Bankman-Fried and FTX are under investigation by the Department of Justice and the Securities and Exchange Commission. The investigations likely center on the reports that FTX may have used customers’ deposits to fund bets at Alameda Research.

 

The blow up of a company that was once valued at $32 billion is also likely to cause lawmakers to look closer at regulating the industry.

 

Bankman-Fried has been a vocal advocate for increased government regulation of the crypto industry, lobbying on behalf of the Digital Commodities Consumer Protection Act (DCCPA) . It’s unclear whether lawmakers will move forward with the bill as written or if they’ll reevaluate the legislation in the wake of the FTX blowup.

 

For many crypto enthusiasts, government regulation is contrary to the original idea of cryptocurrency and Bitcoin, which was proposed as a decentralized way of running a financial system. Additionally, the fall of a significant centralized exchange like FTX highlights the differences between centralized and decentralized exchanges. Opponents of centralized crypto exchanges point to the fall of FTX to show how the security of decentralized exchanges is the only way to move forward with crypto.

 

Additionally, the issues facing investors who stored their holdings with FTX reinforce the idea that investors need to hold their crypto in their own crypto wallets if they want to make sure they always have access to their money.

The Takeaway

The details of FTX’s bankruptcy are still coming out, so it’s unclear what the true fallout will be. FTX’s collapse is just another dark moment in the crypto market during 2022.

 

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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

SoFi Invest
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit sofi.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A..
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA, the SEC, and the CFPB. PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

 

More from MediaFeed:

14 reasons to buy crypto in 2022

 

The primary benefit of Bitcoin and most other cryptocurrencies based on blockchain technology is that many of them lack a central authority, payment processor, or company owner. From this stems several other benefits, such as ease of transactions, potential for higher return for traders, and even relatively good network security.

 

Since crypto networks tend to be peer-to-peer, meaning that people can transact directly with one another. Let’s look at some of the advantages of cryptocurrency in this crypto guide.

 

Ivan-balvan / iStock

 

Crypto transactions can be made easily, generally at a low cost, and in a relatively private manner. Using a smartphone app, hardware wallet, or exchange wallet, almost anyone can send and receive a variety of cryptocurrencies.

 

Some types of cryptocurrencies, including Bitcoin, Litecoin, and Ethereum, can be purchased with cash at a Bitcoin ATM. A bank account isn’t always required to use crypto, so it’s possible that someone could buy Bitcoin at an ATM using cash, then send those coins to their digital wallet or phone. This may be a huge advantage for people who might lack access to the traditional financial system.

 

Related Slideshow: 38 ways to earn passive income

 

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Because cryptocurrencies are rooted in cryptography and blockchain security, decentralized cryptocurrencies tend to make for secure forms of payment. As such, the relative security of cryptos may be one of the biggest benefits for users.

 

Crypto security, in large part, is determined by hash rate. The higher the hash rate, the more computing power is required to compromise the network. Bitcoin is considered to be the most secure cryptocurrency, as it tends to have a higher hash rate than other networks.

 

Note, though, that using a crypto exchange is only as secure as the exchange itself, however. Most incidents of crypto being hacked involve exchanges being hacked or users making mistakes, like falling for phishing scams.

 

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While some people may only want to invest in cryptocurrency to take advantage of (prospective) price appreciation, others might find benefit in the ability to use crypto as a medium of exchange.

 

Bitcoin and Ether transactions can range from a few cents, to several dollars or more. Other cryptocurrencies, like Litecoin, XRP, and others, might be able to be sent for less. Payments for most cryptos settle within minutes, and some within seconds. Conversely, wire transfers at banks can cost significantly more, and often take three to five business days to settle.

 

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The cryptocurrency industry has been one of the fastest-growing markets that most of us have seen in our lifetimes, especially since the industry got its start with the debut of Bitcoin back in 2009.

 

The total market cap of the cryptocurrency market in 2013 was about $1.6 billion. By September 2022, it’s worth more than $930 billion. That, too, is including the so-called “crypto winter” that the crypto markets experienced for much of 2022.

 

So, while the industry as a whole has seen incredible growth over the past decade, it’s important to keep in mind that markets ebb and flow.

 

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Bitcoin has been one of the best-performing assets of the last 13 years. When it debuted in 2009, Bitcoin essentially had no value, but in the following years, it would rise to a fraction of a penny, and then eventually to tens of thousands of dollars. This represents millions of percentage points’ worth of gains. By comparison, the S&P 500 index of stocks returns an average of about 8% per year.

 

Some altcoins have outperformed Bitcoin by wide margins at times, although many of those later saw their prices collapse. Gains like these might be among the most well-known cryptocurrency benefits. The losses, on the other hand, may be among the most well-known drawbacks. And that’s important to note, as crypto prices have fallen quite a bit, as of late. For example, during 2022, Bitcoin’s price has fallen by more than 60% as of September.

 

That type of volatility has characterized prices in the crypto space, which has been one of the key benefits of cryptocurrency for day traders and speculators, too. Taking advantage of the fluctuations in price can help traders earn returns, even if prices fall.

 

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Privacy can be a big benefit of cryptocurrency, but crypto isn’t always as private as some people might think. Blockchains create a public ledger that records all transactions forever. While this ledger only shows wallet addresses, if an observer can connect a user’s identity to a specific wallet, then tracking transactions becomes possible.

 

While it’s worth noting that most crypto transactions are pseudonymous, there are ways to make more anonymous transactions. Coin mixing services group transactions together in a way that makes it hard to pick them apart from one another, which can make it difficult to track for outside observers. Individuals who run a full node also make their transactions more opaque because observers can’t always tell if the transactions running through the node were sent by the person running the node or by someone else.

 

Methods like these are for more advanced users and could prove difficult for those new to crypto. So while absolute privacy is really not one of the main positives of cryptocurrency, transactions are still generally more private than using fiat currency with third-party payment processors.

 

Michael Burrell / iStock

 

Cryptocurrency has become known as a non-correlated asset class.

 

Theoretically, crypto markets largely function independently of other markets, and their price action tends to be determined by factors other than those affecting stocks, bonds, and commodities. Though that theory has been tested this year, as assets of all types of slipped, including cryptocurrencies. It’s worth noting, though, that during the last few years, cryptos have begun to sometimes trade in tandem with stocks for short periods of time.

 

So, in terms of diversification, cryptocurrencies offer investors another vehicle with which to try and grow their money outside of stocks, ETFs, or bonds. Crypto has its own unique risks, but it is another avenue for potential returns for investors.

 

utah778/ istockphoto

 

Mineable cryptocurrencies with a limited supply cap, like Bitcoin, Litecoin, and Monero, to name a few, were traditionally thought to be good hedges against inflation. Because monetary inflation can occur when central banks and governments print more money (increasing the supply), things that are more scarce tend to appreciate in value.

 

With more and more new dollars chasing fewer and fewer coins, the price of these fixed-supply coins as measured in dollars has a higher chance of going up. Additionally, the Bitcoin protocol, for example, is also designed to keep those coins scarce regardless of what happens with monetary policy.

 

The potential of cryptos to stand up to inflation has been yet another test this year, as we’ve experienced higher rates of inflation than in several decades. As mentioned, crypto prices have fallen, but it’s hard to say how much of that has to do with inflation. Crypto may still serve as a hedge, but it may not be as ironclad of a concept as it once was.

 

Yingko/istock

 

Cryptocurrencies have no regard for national borders. An individual in one country can send coins to someone in a different country without any added difficulty. With traditional financial services, getting funds across international borders can take a long time and come with hefty fees. In some cases, doing so might not even be possible due to regulations, sanctions, or tensions between specific countries.

 

But again, cryptocurrency gets around all of that, as users can engage in peer-to-peer transactions from anywhere in the world.

 

SPmemory / iStock

 

Some of the benefits of cryptocurrency extend to people who don’t have access to, or perhaps don’t trust, the traditional financial system. Due to its decentralized and permission-less nature, one of the benefits of cryptocurrency is that anyone can participate outside of that system.

 

People don’t need permission from any financial authority or government to use the crypto ecosystem. (Though it’s worth noting that Bitcoin mining is banned in China, and that there may be other local rules and regulations to take not of.) Participants also don’t necessarily need to have a bank account. There are billions of people today who are “unbanked,” meaning they have no access to the financial system, including bank accounts. With crypto, however, the only thing those people need is a smartphone, and they can essentially become their own bank.

 

Farknot_Architect / iStock

 

One of the great benefits of crypto is that it can be used to exchange value between two parties. This can be done independently of any third-party, making the transaction about as free as it can get. It’s similar to handing a dollar bill to a friend on the street.

 

Banks, or other payment processors, can choose to cut off services to anyone for any reason. This can make things difficult for some journalists, political dissidents, or other individuals working in nations with oppressive government regimes. Because there is no central authority governing Bitcoin or most other cryptocurrencies, it’s very difficult to stop anyone from using them.

 

Cylonphoto / iStock

 

Stock markets, like the New York Stock Exchange (NYSE), are only open on weekdays during the regular business hours of 9:30 am to 4:30 pm Eastern Time. During nights, weekends, and on holidays, most traditional financial markets are not open for business.

 

Crypto markets, on the other hand, operate 24 hours a day, seven days a week, without exception. Some of the only things that could interrupt a person’s ability to trade cryptocurrency would be a power outage, internet outage, or centralized exchange outage.

 

Phira Phonruewiangphing / iStock

 

Some cryptocurrency projects take measures to become more efficient or resource-intensive. That’s a big difference between, say, the traditional banking system, which is often stuck utilizing outdated technologies and protocols.

 

One example: “The Merge,” which involved Ethereum moving from a Proof-of-Work model to a Proof-of-Stake model, effectively ending mining operations, and instead, adopting a much more efficient operating model. The ability of cryptos to change things up in a big way, and on a widespread, operating level, means that it has another advantage over traditional systems.

 

bernardbodo / iStock

 

Some cryptos can be designed specifically for certain projects or uses. Some cryptos, for instance, are designed to work with metaverse projects or games, and can be used to help create in-game assets or tokens.

 

Others, like Ripple (XRP), are designed for use by businesses to make transactions. There are myriad ways crypto can be designed or adapted for specific uses.

 

Dennis Diatel Photography/iStock

 

Transactional freedom, security, and ease of transaction are among the most important advantages of cryptocurrency. Many cryptos are designed to have unique advantages over fiat currencies or the traditional banking system, even if they don’t have widespread use or adoption yet.

 

Of course, there are potential flaws as well — volatility being a major downside.

 

As with anything, though, those interested in buying, selling, and trading crypto would be wise to do their research before getting involved in the crypto market.

 

Chinnapong/iStock

 

Is cryptocurrency a good investment?

Cryptocurrency can be a worthwhile investment, and has numerous benefits for investors. It is, however, a speculative investment, and there are lots of risks unique to the crypto markets. As such, investors should do their homework before getting in the market.

What should you know before trading cryptocurrency?

There are many considerations to take into account before trading crypto, including the fact that there are numerous exchanges, ways to trade, and coins on the market. Prospective traders should also know that fees may be involved, and that crypto is a highly volatile asset class.

How do I weigh up the pros and cons of each cryptocurrency?

Many cryptocurrencies are similar, but most are their own, individual projects. As such, researching how they each work, what their intended use is, and what the potential drawbacks are for each crypto is a good place to start when weighing pros and cons.

 

Learn More:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA  SIPC  . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit sofi.Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA  the SEC  , and the CFPB  , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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