What Can We Learn From The FTX Fiasco?

On November 11, 2022, Cryptocurrency giant FTX declared bankruptcy, followed by the announcement that its CEO had resigned.

The bankruptcy affects FTX US, FTX’s crypto hedge fund Alameda, as well as around 130 sister companies.

This news has shaken the crypto world, as just a few days ago the thought of the successful coin going under was unheard of. With the crypto community in a tizzy trying to determine what went wrong, fear surrounding cryptocurrency is growing again.

Even Cryptocurrencies With Good Reputations Are Not Safe From Crashing

FTX’s 30-year-old founder, Sam Bankman-Fried, has long been seen as one of the main faces of cryptocurrency, thanks in part to the $25 billion USD he once had amassed through crypto.

Crypto enthusiasts watched as Bankman-Fried, again and again, stepped in to rescue struggling crypto coins, earning him a reputation as a helpful, ‘white knight’ character. Elite investors like BlackRock and Sequoia Capital even backed FTX, making it one of the largest crypto exchanges in the world.

FTX also spent large sums of money for celebrity endorsements, backed by the likes of Tom Brady, Gisele, and Steph Curry. With FTX logos adorning the home of NBA’s Miami Heat, and some MLB umpire uniforms, FTX’s fall was something no one could predict.

The successful past of FTX and its many endorsements could not save it from its fall, which cost users billions of dollars. The beginning of the end for FTX is assumed to be when they made the decision to lend billions of their customers’ dollars to fund risky bets by Alameda. Alameda now owes FTX a whopping $10 billion, which the company will likely struggle to afford.

What Now For FTX?

FTX is in the process of filing bankruptcy, with the hopes that doing so will give the exchange a chance to assess their situation and come up with the best plan for reimbursing stockholders.

Although FTX does own between $10 and $50 billion in liabilities and assets, bankruptcy attorney Eric Snyder still worries they won’t have the money to fund their bankruptcy, let alone pay back investors.

Bankman-Fried has hired Paul Weiss attorney Martin Flumenbaum, best known for representing the junk-bond trader, Michael Milken.

What Can Be Learned From This Incident?

Transparency and poor risk management can kill a cryptocurrency or crypto exchange, no matter how successful. If FTX hadn’t used billions of dollars of its investors’ money to back its own hedge company Alameda, it’s likely that this wouldn’t have happened. Just as the average consumer wouldn’t allow a bank to gamble with their money, the same should hold true for crypto exchanges.

When investing your money, be careful who you trust. Do as much research as possible, see what others have to say, and even then remember to tread carefully. The world of cryptocurrency is extremely volatile, and even the most trusted cryptocurrencies can come crashing down.

Article Link - What Can We Learn From The FTX Fiasco?

Author - Jessica Aurelia

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