Collapse In Crypto Land: All You Should Know About the FTX Exchange Crash

The crash of the second-largest exchange may have caught the crypto community by surprise. For many, this was never expected to happen.

The year 2022, has brought both good and bad for the crypto ecosystem. However, it seemed that investors of this revolutionary industry would have to bear the impact of more capitulation than profits. Having survived the effect of the fall of LUNA, crypto traders may have thought that the worst was over. Unfortunately, it was not the end as the entire market capitalisation fell below $1 trillion due to the collapse of one of the top exchanges globally. Want to know the whole story? Stick around and read this to the end.

On November 8, 2022, the CEO of the FTX exchange, Sam Bankman-Fried (SBF), tweeted that its biggest competitor, Binance, had come to its rescue. This was after a series of denials by him and his partner company, Alameda Research that it was facing liquidity challenges. As you probably know, there are some risks associated with trading cryptocurrencies. This event here is one of those that the Bitcoin Up platform describes on its official website, as sometimes, out of your control.

The Saviour Has Become The Saved

The crash of the second-largest exchange may have caught the crypto community by surprise. For many, this was never expected to happen and the reasons are very glaring not to ignore. Just months ago, SBF, as Sam is fondly called, was the one coming to the aid of firms that became insolvent. The man, who Forbes once tipped to become the next Warren Buffet made a significant investment in Robinhood. During the same period, FTX gave credit facilities to companies including BlockFi and Voyager Digital.

To even make matters worse, some unconfirmed reports showed that SBF had offered $15 billion to Elon Musk as an addition to the latter's Twitter purchase. While Musk declined, he chose to opt for the $500 million offered by Binance through Changpeng Zhao (CZ) who acts as Binance's CEO. So, how exactly did a company that had $15 billion in liquid cash become one to halt withdrawals of its users?

Well, the story only erupted when CZ alerted the crypto community that it was selling all of its FTT holdings. Note that FTT is the native token of the FTX exchange. The Binance CEO further revealed that there were cogent reasons for the company's actions. While noting that it was trying to avoid another LUNA episode where it lost about $200 million, CZ said that his firm was liquidating due to reports of unbalanced books at FTX and Alameda.

In light of the tweet, Alameda's now-erstwhile CEO, Carolien Ellison had offered to buy Binance's FTT holdings at $22 a piece. CZ, in his own right, turned down the offer. That was the beginning of the fall of FTT and the market at large. However, not many expected that Sam or FTX would have gone running for loans especially as the exchange reportedly received withdrawals of up to $6 billion from users. When it could not provide any more liquidity, CZ confirmed that it had agreed to an LOI with FTX to come to its aid. Despite that, users could not withdraw their holdings on the platforms, even up till the time of this writing.

Is It Game Over?

Shortly after it was confirmed that there was no respite for FTX, the market started reacting. In addition, there was also a lot of panic from several investors. This was not surprising as FTX, who formerly processed millions of dollars in transactions daily, was a strong competitor for Binance, the world's largest exchange. Notably was FTT, which dumped over 45% of its value in less than two hours. As of this writing, CoinMarketCap revealed that the token's seven-day performance was an underwhelming 86.83% decrease while trading at a meagre $3.

Source: TradingView

However, the exchange token was not the only one that felt the impact. Bitcoin, which had earlier recorded giant strides up the chart a few days before, suddenly crashed to below $17,000 in less than 24 hours. Despite trading above $20,000, the top-ranked cryptocurrency was unable to salvage the rest of the market from slumping. In fact, Vitalk- Buterin-created Ethereum went as low as $1,185 while stablecoin, USDT was unable to hold on to its $1 peg as it fell to $0.96. As of this writing, the crypto market value was $835.56 billion— a point it did not even hit during the Do Kwon- LUNA debacle. With all these playing out, it would be a miracle if these assets revive in a short period. Considering that the current market condition was very bearish, it may now seem that the market recovery expectations are now in ruins. Interestingly, Binance had initially said that it would go ahead with the FTX acquisition. However, new revelations were coming in, pointing out that the deal might be off the table.

Deal Off? And It's a Wrap

According to reports, FTX and Alameda's books were so bad that Binance had considered not going forward with the deal. In addition, SBF had said that its United States enterprise of the exchange was not part of the deal. However, it seemed that Binance was planning to exit if FTX US was not added to the acquisition. Nevertheless, the impact of the exchange collapse is as clear as the day and investors might need to be extra careful.

In conclusion, this was not the first time that such a damning event has happened in the crypto ecosystem. However, there was no certainty that the market would recover from this one. At the same time, it is possible that many investors would assume that it is a good point to accumulate some coins. Maybe, maybe not but you should realise that events like these come with a lot of volatility. So, exercising caution and remaining in trusted stablecoins may be the way to go. Finally, remember that any kind of investment requires due diligence. So, if you believe that market capitulation means prices are at the bottom, you should think again. Better still, do intensive research before committing your capital.

(Disclaimer: Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)