Why the FTX collapse is a big deal

You should have already read the news that crypto exchange FTX has run into liquidity problems and Binance has signed a non-binding letter of intent to buy it out.

Crypto investors thought the worst was behind them after the spring crash, only to be dealt another major blow – and this one is a big shock. Here’s why.

FTX founder Sam Bankman-Fried / Photo credit: FTX

Size

FTX is one of the largest crypto exchanges in the world in terms of market capitalization – at one point it was second only to Binance. It is one of the biggest collapses the crypto ecosystem has seen – just look where it ranks among the top casualties:

• Terraform Labs – US$60 billion
• FTX – US$32 billion (valuation as of February 2022)
• Celsius – US$25 billion
• Three Arrows – US$10 billion

Sam Bankman-Fried’s fall from grace

Sam Bankman-Fried, founder and CEO of FTX, has gained a lot of clout and built a positive image over the years. He has amassed a net worth of US$15.6 billion, which has reportedly fallen to less than a billion.

Earlier this year, he signed the Giving Pledge, which publicly committed him to giving most of his wealth away to philanthropic causes. He appeared on the renowned The David Rubenstein Show mere months ago, which only features the great and the good of the financial world.

He is also soft-spoken and humble, not like Terraform Labs founder Do Kwon’s brash personality. How could things have gone wrong for such a respectable person?

Backed by high-profile investors

FTX has a suite of big-name investors – including Temasek, SoftBank, Sequoia Capital, and BlackRock – that have poured US$1.8 billion into the exchange. These top-tier investment firms must have done their due diligence, right?

With so many pairs of eyes scrutinizing the investment, it would be a surprise if these backers missed anything.

A white knight

FTX was the white knight that prevented its fellow crypto firms from dying. It was a savior who helped to stabilize the market.

The exchange lent US$120 million to Liquid and bought it for an undisclosed sum thereafter. It also acquired Voyager for US$1.4 billion.

To make these acquisitions, FTX needed significant financial muscle. Taking this into consideration, you can see why it was one of the last crypto firms people thought would fail.

So what happened?