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How FTX Collapse Is the Lehman Brothers of Crypto Sector?

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VOC, Voice of Crypto, FTT, FTX Exchange

Key Insights

  • On 11 November 2022, Bankman Fried, the former “King of Crypto,” filed for bankruptcy.
  • The downfall of FTX began when Alameda Research’s Balance Sheet showed an unusual trading pattern.
  • On 15 September 2008, Lehman Brothers Holdings Inc. filed for bankruptcy in the United States.

 

On 11 November 2022, Bankman Fried, the former “King of Crypto” and the CEO of companies FTX, FTX US, and Alameda, filed for bankruptcy.

This sudden downfall of the former crypto giant with a net estimated value of $32 Billion has shown the entire world how fragile the crypto economy truly is. In fact, because of this sudden turn of events, some people call FTX the Lehman Brothers of the crypto world.

 How Did FTX Meet Its Untimely Demise?

FTX  is a centralized cryptocurrency exchange. Founded in 2018 by Sam Bankman-Fried, it specializes in derivatives and leveraged products.

When November began, FTX controlled one of the world’s most valuable cryptocurrency exchanges. Then, what exactly happened that led to the company’s untimely demise?

In short, FTX faced a situation that is equivalent to that of a bank run.

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The customers of FTX lost their faith in the company, got anxious about the security of their crypto assets, and thereby began withdrawing them as fast as possible.

The Downfall of FTX

The downfall of FTX began when Alameda Research’s Balance Sheet showed an unusual trading pattern wherein the sheet was full of FTX’s own token, FTT. Following the news of large-scale withdrawals, large corporations like Binance also started liquidating their stock of FTT tokens.

The continuous withdrawal of FTX tokens is undoubtedly bad for its business since the value of a company that deals in crypto assets depend on people’s use of the platform for trade.

However, since FTX is not a bank, one may think that it would have its customers’ assets on hand and be able to come out of the crisis once it hands over the assets.

The reality is not as simple as it may seem. As it turns out, FTX had lent a huge sum of money to Alameda Research, also owned by Bankman-Fried.

Consequently, Alameda, suffering from one loss after another, could not pay these loans back. Thus, when the users of FTX tried to withdraw their assets, FTX did not have them. This led to the company’s eventual bankruptcy.

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The company’s CEO using its funds to sustain another company owned by him is a tale as old as time.

However, this situation differs from classical monetary scams because the money in question was technically never real. A large portion of FTX’s funds was in the form of its own invented token-FTT.

Alameda was also mostly financed by FTT in billions. In simple words, FTX lent billions of dollars to Alameda in imaginary currency, and the latter used this to speculate on the value of other imaginary currencies.

Consequently, there is no doubt that the downfall of FTX and its value was bound to happen.

What Happened to Lehman Brothers?

On 15 September 2008, Lehman Brothers Holdings Inc. filed for bankruptcy in the United States.

As USA’s fourth-largest investment bank, the bankruptcy was the largest proceeding in US history and had given way to a global financial crisis.

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Like FTX, Lehman Brothers had an estimated net value of billions before its downfall. In the years leading up to 2008, the balance sheet of Lehman Brothers, similar to that of FTX before its downfall, showed an excess of mortgage debt.

Consequently, the value of the assets fell almost overnight as the housing market suffered a huge blow. This caused the Lehman Brothers to go bankrupt and gave the United States a taste of the worst financial crisis after the Great Depression of 1929.

Thus, although calling FTX the Lehman Brothers of crypto is an issue that can be debated on technical terms, it is not necessarily wrong.

Just as the fall of Lehman Brothers had shaken the global investment economy, the fall of FTX has destabilized the crypto economy to a large extent.

What’s Next for the Crypto World?

Although the overall impact of the fall of FTX is yet to be gauged, this may only be the beginning of something large.

Despite the fragility of the crypto economy being known to almost every investor, these recent events have made it even more evident.

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What makes the collapse of Alameda Research and FTX more concerning is that the number of large and so-called “reliable” crypto actors is decreasing faster.

If this keeps on happening, then a complete structural change in crypto is expected in the future.

This may, in turn, completely compromise the decentralized infrastructure of Web3, thereby eliminating the main foundation on which it stands.

However, despite speculations, what is to happen to crypto can be determined only by the future.

 

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A post-graduate is Sociology, Sreerupa's interest primarily lies in researching on the global market trends of production and consumption.

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