01/12/2022

What lessons can be learned from the collapse of the FTX

FTX exchange collapse: what lessons can be learned?

Until November 2022, the FTX exchange used to rank among the top cryptocurrency exchanges in terms of trading volume and the number of services offered. Therefore, it was logical to add a connector for the FTX exchange to the ATAS platform.

However, something unbelievable happened after that (even though cryptocurrency exchanges have problems on a regular basis, which is unfortunate).

In this article you will find out how the FTX bankruptcy story unfolded, what will happen next and what an ordinary trader should do.

Read in the article:

Timeline of the collapse
Can an ordinary trader get their money back?
Seven lessons to be learned

Start using ATAS for free with no time limits! Or activate the advanced tariff right now to access the full range of functionality.

To try ATAS free of charge

Timeline of the collapse

2017. In November 2017, a former Wall Street trader Sam Bankman-Fried founded Alameda Research, a quantitative trading firm.

2019. Sam Bankman-Fried (below on the left) and a former Google programmer Gary Wang (below on the right) founded the FTX.COM cryptocurrency exchange.

Sam became the CEO and face of the exchange. Gary was comfortable keeping away from the public, so he became a chief technology officer.

2021 год. FTX raised a $900 million funding round, the exchange was valued at $18 billion. A few months later, FTX signed a sponsorship deal with the Mercedes Formula 1 team and also raised capital at a valuation of $25 billion from investors, Singapore-based Temasek and Tiger Global.

2022 год. FTX raised funding from the SoftBank Group and other investors and signed a sponsorship deal with the Miami Heat.

Amid the bear market, FTX and its sister hedge fund Alameda Research looked prosperous. Moreover, Sam Bankman-Fried became a savior for other members who needed help.

At the end of August 2022, The Wall Street Journal wrote that he spent a billion dollars to do it. For example, $240 million was given to a troubled crypto lender BlockFi.

Sam was like the legendary J.P. Morgan who bought shares to save the US economy during the 1907 stock market crash.

The path from a rescuer to a destroyer took less than three months.

On November 2, 2022 CoinDesk wrote that Alameda Research had too many FTT – tokens issued by FTX.

Статья, из-за которой начались проблемы у FTX

It turned out that FTX issued tokens that were later used to purchase assets through a sister company. It was unfavorable for numerous assets owned by Alameda.

According to official information, the assets of the Alameda fund amounted to $13.46 billion at the end of September 2022. This is approximately equal to the capital managed by Bill Ackman, Paul Tudor Jones or Jeffrey Talpins.

Four days later, the head of the world’s largest exchange, Binance, Changpeng Zhao, tweeted that his exchange had decided to liquidate positions in FTT tokens as it was too risky – a lesson learned from the collapse of the LUNA token.

It was not yet clear at the time what the consequences of that tweet would be.

The FTT token started to tank.

The public got nervous. Naturally, people also hurried to sell FTT tokens.

On November 7, Sam assured that “everything was okay” trying to reassure the clients of the exchange, but shortly after that there were reports saying that the withdrawal of funds from the FTX exchange was difficult or even became completely impossible.

On November 8, FTT collapsed. Next, Bitcoin and other cryptocurrencies updated their lows of the year.

Sam asked Binance and other organizations for help but to no avail.

On November 11, cryptocurrency exchange FTX filed for bankruptcy protection after traders had withdrawn $6 billion from the platform in three days.

As a result of the collapse, about 1 million creditors faced losses totaling billions of dollars.

Investigations began and it turned out that:

financial records and staffing table were not kept properly at FTX;
clients’ money was used to conduct transactions in favor of FTX;
loans were taken using the issued FTT token;
expensive real estate in the Bahamas was bought for company employees and Sam’s family members;
various unethical facts.

What will happen next?

There will be trials, lawsuits, attempts to withdraw investments. Sam might go to jail.

Those Americans who made deposits to the American “daughter” of FTX US are more likely to save them (if the funds have not been withdrawn). It is possible that some of the investment can be saved by such influential legal entities as the Blackrock Fund which have the resources to hire high-class lawyers.

For the majority of other investors and traders who opened accounts on the stock exchange in the Bahamas (main) jurisdiction, the forecasts are disappointing.

And then there will be one “bubble”.

Homo sapiens rarely managed to resist the temptation of quick and easy enrichment. Tulip mania, the South Sea bubble, railroad stocks, dot-com stocks, the Bernie Madoff scam, they have all come the same way, and there will be more of them.

Seven lessons to be learned from the FTX collapse

Beware of idols. Sam was an extraordinary billionaire in shorts and slip-on sneakers. He has been known to play League of Legends during business phone calls. Young crypto investors loved the “unkempt millennial” style, but they paid a high price.
Beware of following the crowd. An aggressive promotional campaign, sports team sponsorship, celebrities (Shaquille O’Neal, for example) among clients – this can seem like remarkable success. However, there is a reason to regard it as a way of attracting the “crowd”.
Do not put all your eggs in one basket. Keeping all the capital in one exchange (with one broker) can be fatal.
Trends last longer than you expect. Bitcoin’s consolidation near the $20K level gave rise to speculation that the crypto market had found a bottom (or is close to it). However, amid the news of the FTX collapse, Bitcoin fell below 16 thousand.
Do not borrow to invest. Using leverage is a double-edged sword. When the effect worked “in plus”, the stock exchange developed rapidly. As soon as the effect began to work “in minus”, bankruptcy occurred.
The crypto industry needs regulation. This is increasingly asserted by those who now want to return their money from FTX accounts.
When making decisions to open positions, rely on real facts. These can be proven strategies based on volume analysis.

Before risking real money, test your ideas on a history simulator or demo account to make sure they actually work.

Conclusions

All bubbles have one thing in common: when it comes to making big money, investors lose their heads. The too-fast success of FTX (founded in 2019, had over a million users in July 2021 and was the third largest cryptocurrency exchange by volume) hid significant risks.

The collapse of FTX caused irreparable losses for private traders and may become a driver for other bankruptcies.

Therefore, we recommend you to:

Read “Black Swan” by Nassim Taleb.
Take measures to reduce risks.

Do not risk money you cannot afford to lose. Eliminate emotions and act using the facts that are provided by price and volume charts.

Read our blog and subscribe to our YouTube channel to find out how to use the arsenal of ATAS instruments to gain a real advantage in the market and develop your own strategy.

Information in this article cannot be perceived as a call for investing or buying/selling of any asset on the exchange. All situations, discussed in the article, are provided with the purpose of getting acquainted with the functionality and advantages of the ATAS platform.