The FTX Scam Explained: When Cryptos Go Wild

Introduction

In the ever-evolving world of cryptocurrency, we’re no strangers to the highs, lows, and the occasional eyebrow-raising incidents. Today, we’re turning the spotlight on a recent headline-grabber: The FTX Scam.

The crypto currency exchange platform quickly gained huge popularity following its launch in 2019. Yet, by November 2022, it had all but crashed and burned. So, what happened? At Crypto Tax Degens, we know a thing or two about cryptocurrencies. So, we’ve pulled together all the information you need to know about FTX, from its roaring start to its dramatic end and what this means for the wider industry. Let’s get into it.

What is FTX?

FTX, an abbreviation for Futures Exchange, was a centralised cryptocurrency exchange founded in 2019 by Sam Bankman-Fried and Gary Wang. During its remarkably short time in operation, it grew into the world’s third-largest exchange by trading volume, promoting the liquidity and transacting of coins and tokens.

The platform offered a wide range of trading products, including spot markets in over 300 crypto currency trading pairs, derivatives and leveraged products. It became a candy store for crypto enthusiasts – traders could diversify their portfolio until they became as varied as a hipster’s vinyl collection.

And, thanks to their reasonable trading fees that offered competitive rates on the market, traders could maximise their profits while minimising their costs. It was the best of both worlds… for a time.

What is FTT?

Now, we can’t talk about FTX being a candy shop without mentioning the cherry on top of the cake: their native token, FTT. FTX designed this digital token and it played a huge role in its rapid growth.

Holders of FTT had a golden ticket. They enjoyed reduced trading fees, letting them save on transaction costs, and got front-row seats to token sales. They even had priority access to new features and products on the platform. Not only did this feature incentivise users to hold and engage with FTT, but it also created a community and crypto camaraderie among FTX users.

How did FTX grow?

FTX’s journey from a budding crypto platform to the world’s third-largest exchange is nothing short of impressive. It can’t just be attributed to FTT, as effective as it was in building its user base. So, what was the secret sauce behind this meteoric rise?

For starters, FTX focussed on providing advanced trading features, like leveraged tokens, options trading, and futures contracts. This attracted both crypto newbies and the trading elite, bolstering FTX’s standing in the industry.

Next up in their genius playbook? Strategic expansion. They teamed up with some of the big guns in the investment sphere, like Sequoia Capital. These partnerships not only provided financial backing, but also opened to new users and expanded FTX’s global reach.

And if you think FTX was subtle about getting word out, think again. From striking up deals with top-tier sports teams, to attending major events, they stamped their footprint in both the crypto world and mainstream markets.

What went wrong with FTS?

During the tail end of 2021 and early 2022, Bitcoin’s value started to drop drastically, and other cryptos started to follow. While numerous prominent platforms pulled their shutters down, FTX adopted a more aggressive strategy, gobbling up rivals in the market.

Yet, FTX’s ascent met a brick wall in November 2022. CoinDesk dropped a bombshell, revealing that Alameda Research, another brainchild of Bankman-Fried, leaned heavily on FTX’s token, FTT, with a whopping asset value of $5 billion. Shortly after, FTX’s balance sheet was leaked.

It showed that the ties between FTX and Alameda were uncomfortably tight, highlighting a severe lack of diversification. The financials listed a concerning $9 billion in liabilities against a meagre $900 million in assets, with a jarring deficit of $8 billion.

As it happened, Alameda borrowed as much as it liked from FTX, dipping frequently into its funds that were largely made up of customer deposits.

And, as if that wasn’t enough to seal the last nail in the coffin, the companies did not produce balance sheets showing assets and liabilities. The balance sheets they did create were never audited, as they were private companies. Without these audits, there was no record of cash flow and no way to prove FTX could cover its liabilities and customer assets.

On November 8, FTX competitor Binance, agreed to buy out FTX. However, as the full extent of its problems began to surface, it announced it would sell all of its FTT tokens. This resulted in customers withdrawing money from their accounts, and FTX losing billions of dollars.

In a last ditch effort to save itself, FTX removed the withdraw option on its website, blocking customers from accessing their money. When it accepted that it could not pay the $8 billion gap, it finally filed for bankruptcy.

Does the FTX crash affect other digital currencies?

The FTX crash wasn’t just a blip on the radar; it had a significant impact on other digital currencies and the overall perception of cryptocurrencies. The shockwaves of this scandal were felt far and wide in the crypto realm. News of its troubles quickly made rounds, sparking anxiety in the market. Investors everywhere were revisiting the age-old question: “Are my digital assets safe?”

A number of other exchanges were exposed to the FTX crisis, and their actions in response were varied. Some immediately stopped FTX token trading, prioritising increased security measures. Others weren’t as fortunate, seeing a drop in trading volume and a dip in trust from their users.

This incident had investors rethinking the crypto landscape. Concerns about transparency and accountability in the industry became front and centre, and many started questioning the long-term prospects of digital currencies.

Inside the crypto community, however, opinions were split. Some saw the FTX crash as an isolated mishap, while others took it as an indicator of the broader volatility inherent in the crypto market.

Overall, this scandal had a ripple effect on other digital currencies. It influenced exchanges, shifted investor sentiment, and adjusted the lens through which many view cryptocurrencies, reminding the industry of the need for increased regulation and security measures.

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