What is the FTX incident?
Introduction
The collapse of the cryptocurrency exchange FTX was one of the most significant incidents in the crypto industry’s recent history. Once very popular and seemingly well-managed, FTX suddenly went bankrupt, leaving many in the community questioning the safety of their assets on centralized platforms. Understanding how this happened and the lessons learned can help prevent similar incidents in the future.
Background on FTX
Foundation and Growth
Established in 2019 by Sam Bankman-Fried, who also founded the cryptocurrency hedge fund Alameda Research.
Gained popularity for its user-friendly interface (UI/UX), low fees, and advanced trading features (including derivatives and cross-margin).
Became a preferred exchange for many traders due to its fast listings of new assets and easy borrowing features.
Main Causes of the Bankruptcy
Misappropriation of Customer Assets
FTX lent billions of dollars worth of customer funds to its subsidiary, Alameda Research.
As long as Alameda’s investments were profitable, the misuse of customer assets wasn’t immediately exposed.
Risky Collateral (FTT Tokens)
Alameda held large amounts of FTT, a token issued by FTX, which was used as collateral for borrowing.
FTT lacked liquidity and stability, making it a significant risk factor if the market turned unfavorable.
Mounting Losses and Insolvency
When Alameda Research suffered heavy losses, FTX tried to provide additional financial support by injecting even more customer assets.
This further endangered customer funds, leading to doubts about FTX’s solvency.
Customer Run
Growing concerns about FTX’s financial health triggered a large-scale withdrawal of funds.
FTX was unable to meet these withdrawal requests due to insufficient backup assets and was forced into bankruptcy.
Poor Management Structure
Inadequate oversight and opaque decision-making processes contributed to the rapid downfall.
The crisis also extended to subsidiaries like FTX Japan and FTX Earn, further damaging the exchange’s reputation and financial health.
Industry Impact and Response
The FTX collapse shook confidence in centralized exchanges and highlighted the importance of transparency. In response:
Proof of Reserves: Some exchanges have started adopting on-chain verification methods to prove they hold sufficient customer assets.
Reassessment of Centralized Platforms: The industry as a whole now scrutinizes how exchanges manage user funds.
However, the credibility damage inflicted by FTX’s bankruptcy remains significant and continues to affect public trust in centralized crypto services.
Example: Impact on Solana and Potential Gains
A striking example of how FTX’s failure caused broader market distortions was its heavy investment in Solana (SOL):
FTX and Alameda’s SOL Holdings: Large SOL holdings plus significant positions in Solana-based tokens and equity caused extreme price volatility when FTX collapsed.
Serum and Wrapped Tokens: Serum (SRM) faced uncertainty over administrative key controls, and wrapped tokens that FTX managed as collateral also encountered major distortions.
Chain Exodus: Even assets not directly involved were affected, leading many users to withdraw from the chain, further aggravating price instability.
Conclusion
FTX was once a top-tier exchange but fell apart in just a few days due to mismanagement and the misuse of user funds. This incident serves as a stark reminder of the crypto ethos: “Don’t trust, verify.” Users should maintain healthy skepticism, avoid over-reliance on centralized platforms, and remain vigilant about opaque management structures and transactions. By doing so, both individual investors and the broader crypto industry can work toward safer and more transparent markets.
