What are the reasons for FTX Collapse?

What are the reasons for FTX Collapse?

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23/12/2022 by Hediye
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On November 2022, the crypto exchange FTX faced bankruptcy for over 10 days. The exchange had a liquidity problem when a report raised possible strain and solvency issues. FTX tried to rescue itself from the collapse by receiving help from its competitor, Binance. However, the talks immediately broke down. In days, FTX had its funds
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On November 2022, the crypto exchange FTX faced bankruptcy for over 10 days. The exchange had a liquidity problem when a report raised possible strain and solvency issues. FTX tried to rescue itself from the collapse by receiving help from its competitor, Binance. However, the talks immediately broke down. In days, FTX had its funds blocked, its CEO had stepped down, and it had declared bankruptcy.

What is FTX?

FTX was one of the world’s leading digital currency exchanges by its interaction quantity. On FTX, 9 fiat currencies were offered. It was established in 2018. It provided a user-friendly experience, whether from desktop or mobile applications. Users could exchange digital currencies for another, or Cryptocurrencies for the traditional form of funds, or vice versa. Mr Bankman-Fried was in charge as its manager. FTX was located in the Bahamas. It dedicated considerable funds to lobbying American lawmakers to implement cryptocurrency-friendly regulations.

What do we know about FTX bankruptcy?

The FTX corporation has based its operations on unsafe stocks, prohibited in the US, where Blockchain businesses are closely monitored.

FTX has been involved in Chapter 11 bankruptcy proceedings in US courts since November 11, 2022. Crypto investors’ community concern started after a story revealed that FTX-associated company Alameda Research retained a fair chunk of its funds in FTX’s coin, FTT.

After the news of Alameda Research, another competing exchange firm declared that it would liquidate its token investments. This announcement was shortly followed by a surge in client withdrawals from FTX.

The number of user withdrawals was too much for FTX to handle. The collaborated firm submitted a statement of commitment to acquire the company with due diligence to pursue the procedure so that customers may rapidly retrieve their funds from FTX. However, they cancelled their deal the next day, stating claims of improper handling of user cash and U.S. government inspections.

How is the FTX bankruptcy influencing the crypto Market?

With its reliability, the crypto market has always tried to win over merchants, authorities, and regular consumers. After the collapse of FTX, users get more sensitive about the market and the security per transaction. However, following the collapse, the Attorney General and the Safety and Trade Council investigated if FTX irregularly used customer assets to assist Alameda Research. There are still some doubts from customers.

In May, the $2 trillion crypto market collapsed, and FTX provided economic support to many bankrupt companies. While previously, FTX was the financial provider for the market. Due to time, Its collapse has impacted the sector, and several institutions have declared interruptions in their activities.

Why did FTX run into trouble?

We will mention a few reasons why FTX run into trouble below:

  • Merchants use FTT for banking activities, including payments and trading. The CEO of Binance returned the FTX tokens to Mr Bankman-Fried. 
  • A market-value company supported the start-up as Alameda Research. According to a public statement, the amount of FTT characters used by Bankman-Fried was unusual. To manage his company, Mr Almeida needed funds. The fund was provided by Alameda Research, which Bankman-Fried owns. However, due to how those organizations were established, when one department experienced problems, it impacted the other.
  • Binance stated on November 6th that it will sell down its FTT holdings, using the phrase “in continuing of the latest discoveries.” As a consequence, the value of FTT decreased, and merchants started to worry that FTX would lose another digital currency firm.
  • In early November, FTX faced a rise in consumer withdrawals. The amount of withdrawal was about $6 billion in 3 days. Accordingly, Sam Bankman-Fried, CEO of FTX, acknowledged that there weren’t enough funds available to fulfil customers’ needs.

Why did the bargain between Binance and FTX break?

Binance declared on November 9th that it will no longer go through with the purchase of FTX, claiming that this final choice was made “as a consequence of business due diligence.” Additionally, claims of misused finances and governmental inquiries were raised.

Clients would endure a loss each time a significant player in an industry collapses, according to a release from Binance. Through the past couple of years, the cryptocurrency environment has been strengthening. Eventually, misfitted companies are expected to filter out to decrease violated user assets.

 

What next for FTX?

There is no other option for FTX investors currently. They need to wait for the bankruptcy legal process. The process court may take a long time to decide whether their withdrawal demands will be fulfilled. Further, courting has already been issued regarding the scamming of FTX consumers, and police prosecutions may be in progress.

The effects on the larger crypto market are still being analyzed and are challenging to evaluate. The failure of one of the largest cryptocurrency exchanges is a stain on the industry’s relatively young history, which many experienced traders already consider the Wild West with few rules and oversight. It emphasises the importance of additional regulation in the cryptocurrency sector since it is obvious that there is still a way for malicious individuals to take advantage of others.

The business must either locate billions of dollars to match client withdrawal requests or develop a method to reassure consumers that their investment is secure to stop the outflow. When there are a lot of customers rushing for the door, that will not be easy. According to Bloomberg, Bankman-Fried sentenced that the cooperation had an $8 billion liquidity crisis and required $4 billion to be stable again.

Conclusion

The FTX collapsed in 2022. Due to the collapse, professionals expect an effect on the digital currencies market. The consequences of FTX’s growth and the more significant cryptocurrency sector are still being felt today and are hard to predict.

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