In a flash, FTX Trading goes from crypto boom to bust
Until recently, FTX Trading was the toast of the cryptocurrency world.
In 2021, the company's revenue skyrocketed more than 1,000% to $1 billion as it capitalized on public interest in the potential of digital currencies to build wealth. FTX also trumpeted its brand with splashy Super Bowl ads featuring quarterback Tom Brady and comedian Larry David. Underlining its meteoric rise in the corporate world, the company bought the naming rights to American Airlines Arena in Florida for $135 million and renamed it FTX Arena.
A year later, FTX now finds itself on the edge of bankruptcy, facing billions of dollars in losses and a federal probe. The company's blistering ascent and sudden plunge — along with the fate of its respected founder and CEO, Sam Bankman-Fried — resembles nothing less than the dizzying swings of cryptocurrency itself.
A deal gone bad
The swift turnaround in FTX's fortunes has shocked the cryptocurrency world. On Tuesday, the CEO of rival crypto exchange Binance, Changpeng Zhao, said his company had struck a deal to acquire FTX. But he ditched the move a day later, raising questions about FTX's financial viability.
In a subsequent call with investors, Bankman-Fried said FTX needed about $8 billion to back up the crypto assets users have on the platform, Bloomberg News reported. He also said that, without an imminent infusion of cash, the company might have to file for bankruptcy, according to Bloomberg.
FTX didn't immediately respond to a request for comment. Bankman-Fried tweeted Thursday that FTX is "spending the week doing everything we can to raise liquidity."
10) So, right now, we're spending the week doing everything we can to raise liquidity.
— SBF (@SBF_FTX) November 10, 2022
I can't make any promises about that. But I'm going to try. And give anything I have to if that will make it work.
"Every penny of that — and of the existing collateral — will go straight to users, unless or until we've done right by them," he tweeted.
A bankruptcy of the world's third-largest crypto exchange would rock an industry that has long attracted unwanted attention from financial regulators and lawmakers, experts told CBS MoneyWatch.
"This is going to be a psychological shock to the industry to say $8 billion worth of client assets are gone," said Josh Peck, an expert on crypto risk. "That's a big deal. People are going to be distrustful. [and] they're going to say things like bitcoin is over."
Compounding FTX's woes, the U.S. Securities and Exchange Commission is now investigating the company for possible violations, The Associated Press reported. Regulators are trying to determine if employees at FTX's trading arm Alameda Research used customer funds to place risky bets on the market.
Deluge of withdrawals
FTX's liquidity issues started months ago when Bankman-Fried said he used incorrect data to make company financial projections.
In a series of apologetic tweets, the CEO said he had mistakenly believed the company had enough cash on hand to pay 24 times the amount of money users typically withdraw in a day; in fact, FTX only has enough cash to pay 0.8 times the amount — a perilously risky cushion for a crypto exchange. The miscalculation came back to haunt FTX this past weekend in a deluge of withdrawals by users.
"Because, of course, when it rains, it pours," Bankman-Fried tweeted. "We saw roughly $5 billion of withdrawals on Sunday — the largest by a huge margin."
A major crypto sell-off that began late last year is also partially to blame for what's now happening at FTX. Popular tokens like bitcoin, ether and ripple have all lost value in recent months, causing casualties at places like Celsius and Coinbase.
In response to the crypto crisis, FTX loaned $500 million to Voyager Digital in June, hoping to help the crypto-lending platform weather a longer-than-expected downturn, CNBC reported. The move proved costly for FTX as Voyager Digital filed for bankruptcy a month later and FTX later paid $51 million to buy out Voyager.
FTX took another financial hit when Binance offloaded its remaining FTX tokens, called FTT, which it received as part of its $2.1 billion exit from FTX last year.
"Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books," Zhao tweeted Sunday.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
Bankman-Fried didn't mention bankruptcy in his tweets, but he vowed to do right by users. However, FTX suspended withdrawals on Thursday, a move that Peck said hurts customers even if the company doesn't go bust.
Despite the likely industry shockwaves if FTX collapses, the crypt sector has about a dozen other "high quality" exchanges to absorb the demand, Peck said. The value of most cryptocurrencies likely won't budge either — with the exception of one, he said.
Alameda Research owns a large amount of solana, and a bankruptcy would probably freeze those coins for an unknown period of time.
"It will still be a tragic circumstance because customers of FTX will have lost a lot of money," Peck said. "But ultimately, the industry will adapt to this."