Why Did FTX Fall? – Here’s What We Know Now

Earlier this week, speculations around the liquidity crunch at FTX sent shock waves across the entire crypto industry.

The news that Binance could potentially purchase FTX slightly saved the day, but when the exchange backed out of the deal yesterday, cryptocurrency prices went into a free fall. 

Bitcoin tumbled to as low as $15,682, a level not seen in two years. The flagship cryptocurrency is currently down by around 8% over the past 24 hours after losing another 8% the previous day. Ethereum, the second-largest cryptocurrency, has also dropped to $1,083, down by around 4% over the past day. 

The broader crypto market is also deep in the red, down by at least 20% over the past week. The total crypto market cap currently stands at $837 billion, a level that was last seen in late 2020. 

Why Did FTX Fall?

As sudden as the FTX downfall might seem, its roots go back months, when SBF stepped in to save other crypto firms as the crypto market collapsed.

Some of those deals involving SBF’s trading firm, Alameda Research, led to a series of losses that eventually became his undoing, according to a Reuters report, which cited three people familiar with the company’s operations.

As reported, speculations around liquidity issues at FTX started to grow earlier this month after CoinDesk reported Alameda Research, which has close ties to FTX, is filled with illiquid assets.

The report claimed that Alameda Research’s balance sheet was loaded with FTX’s native exchange token FTT. Most of the other holdings were in illiquid assets, meaning there was not enough money to cash out if need be.

Meanwhile, Binance CEO CZ, whose relationship had soured with SBF over the past months, announced that the exchange, which held 23 million FTX tokens worth about $529 million at the time, aims to liquidate any remaining FTT on its books. 

The news further deteriorated confidence around FTX, leading to a surge in withdrawals. According to the Reuters report, FTX users rushed to withdraw $6 billion in crypto tokens in just 72 hours while daily withdrawals normally totaled tens of millions of dollars.

The pace of withdrawals made the situation dire. After failing to find a backer, or sell other illiquid assets on short-notice, SBF contacted CZ, asking for help. 

CZ later confirmed that SBF had called him. “FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire FTX.com,” he said in a tweet. 

Nevertheless, in a late Wednesday tweet, Binance said that the “issues are beyond our control or ability to help,” walking away from the deal and leaving the crypto exchange on the brink of collapse.