Why are cryptocurrency exchanges collapsing?

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The collapse of FTX, one of the world’s largest cryptocurrency exchanges, has caused quite a stir and brought concerns about the destabilization of the entire digital asset market. Within days, FTX founder Sam Bankman-Fried’s fortune dropped from nearly $16 billion to nothing. The reasons for this may be varied and complex, but one of the factors may have been the increased risk resulting from the high level of leverage used by the exchange. In addition, low turnover on the cryptocurrency market may have contributed to a decrease in commission income for the exchange. However, a detailed analysis of the situation is necessary to thoroughly understand the causes of FTX’s demise.

The activity of the FTX cryptocurrency exchange

For a long time, FTX enjoyed a really strong position, it was considered the third largest cryptocurrency exchange in the world. The FTX exchange was part of a group of over 100 companies united under the joint ownership of Sam Bankman-Fried and his associates Gary Wang and Nishad Singh.

FTX’s business model was based on charging commissions on transactions made by users and profits from internal trading. The exchange also introduced its FTT cryptocurrency. In addition, FTX was known for its fast order execution and for offering a wide range of cryptocurrencies, including less popular ones that are not available on other exchanges.

As part of its business, FTX also offered an affiliate program for cryptocurrency influencers and an invitation to partner with other companies to bring new products to market. For example, in 2021, FTX forged a strategic partnership with the American sports team Miami Heat, which led to the renaming of the stadium from American Airlines Arena to FTX Arena.

Interestingly, well-known figures from the world of politics, such as former US President Bill Clinton and former British Prime Minister Tony Blair, performed at conferences with the president of FTX. Also, Bankman-Fried himself enjoyed an unblemished reputation for some time? So what went wrong?

What was the cause of the fall?

The collapse of the FTX cryptocurrency exchange caused quite a stir and caused a temporary crisis of confidence in the entire digital asset market. Many industry experts believe that it was one of the loudest and least expected collapses in the history of American corporations. It seems natural that one began to wonder how such a situation could have happened, since the stock market was serious by serious financial investors.

When the founder of Bankman-Fried resigned from his position, he was succeeded by John Ray III, an American insolvency specialist who previously oversaw the collapse of Enron. He stated that he had never before encountered such a lack of control and reliable financial information. So, was the previous success of this cryptocurrency exchange based only on its great image, and the internal affairs related to FTX’s activities were neglected?

An important fact is that the company’s assets were largely dependent on the value of the token it issued itself. It is worth noting that at that time the amount of FTT token that was in circulation was very small. Only a small amount of tokens was released into free circulation, which made the price relatively high. In a situation where it was necessary to quickly liquidate a large number of the same tokens, the company’s capital based on them could turn out to be fictitious.

The FTT token was issued by the FTX cryptocurrency exchange as a way to raise capital and develop the company. As promised, the exchange was to buy back some of the tokens, using the profits from its activities. However, according to a document leaked to the CoinDesk news website, the Alameda group hedge fund used the FTT to make risky loans and trade in company scripts. The discovery has raised concerns among investors about the credibility and stability of the FTX exchange.

In addition, one of the main holders of the FTT, the rival exchange Binance, announced the sale of its shares, which caused an avalanche in the value of the FTT token and led to a situation where customers tried to withdraw their funds from the exchange.

It did not have the ability to accept bank transfers, so customers sent money to Alameda and FTX credited their accounts. But the actual money was never transferred.

The situation related to the difficult situation of FTX drew attention to the risks associated with cryptocurrency loans, especially when using tokens issued by crypto exchanges. It also highlights how important it is for companies operating in the cryptocurrency industry to maintain transparency and stability to build investor confidence.

What does the fate of FTX tell us about cryptocurrencies?

The event related to the collapse of FTX once again showed that the lack of regulation can lead to serious consequences, not only for the exchange itself, but also for thousands of people investing their funds in digital assets. However, it seems that this situation also had a positive side, as people began to wonder what changes should be implemented in the cryptocurrency industry so that history does not repeat itself. It is no secret that the security and trust of customers are the basis for the proper operation of the crypto market.

The collapse of FTX has clearly shown that the cryptocurrency industry continues to grow and needs more regulation. It seems that these changes have started to be implemented, and the USDT related questions are a good example of this. There have been doubts whether it really has the security dimension declared by Tether Limited. Therefore, Tether has been required to provide documents that confirm the appropriate coverage of USDT in the dollar.

What conclusions can the average cryptocurrency user draw from this situation? It may not make sense to keep your cryptocurrency assets in escrow, even with the biggest market players. Investments in tokens with only small amounts admitted to trading on the market should also be avoided, as much larger resources of these tokens are controlled by their issuers. Although the situation on the crypto market is changing for the better every year, it must be remembered that it is still largely unregulated. Due to this, it is important to be careful and familiarize yourself with each cryptocurrency project before investing.

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