FTX Collapse: A Folly or Fraud?

The collapse of the one of largest crypto exchange in the world has send shockwaves through the crypto sector. The crypto sector is witnessing fair share of volatility and turmoil this year, including a sharp decline in price for digital assets including Bitcoin and Ether. This event seems reminiscent of the domino-like failures of Wall Street firms during the sub-prime crisis, particularly now that supposedly healthy firms like FTX are failing. Now the question arises, why FTX failed is it a "folly or fraud—a cautionary tale of excess risk or an empire built on a house of cards"?

Let's understand how the Mr. Bankman-Fried’s (founder and former CEO of FTX) risk approach fueled success and triggered a catastrophic failure. Sam Bankfankman Fried also known as SBF, a risk-loving crypto trader. SBF's appetite for risk draw his attention to the volatility of cryptocurrencies and then he started his trading firm named Alameda research, which makes bets on inefficiency in global bitcoin prices and earned millions of dollars. And his perspective on existential risk is what he said inspired him to earn as much as he could for the express purpose of giving that money away.?

What went wrong? FTX was lending enormous amount of consumer's money to SBF's trading firm to fund the risky bets of Alameda (SBF's trading firm). These hidden loans amounted to more than half of FTX's total assets (Wall Street, 2022). SBF's business fell dramatically after a report that disclosed how much Alameda depend upon FTX's consumer funds. After a tweet by Changpeng Zhao (founder of Binance), that "he was unloading $500 million from FTX" triggered a run on FTX. And Binance also struck the deal to rescue FTX. All this caused collapse of third largest cryptoexchange.