What Factors Led to the Downfall of the FTX Exchange?

    TheMorningCrypto Desk
    TheMorningCrypto Desk
    Published on November 25, 2022 10:16 AM

    Updated on January 25, 2023 7:56 PM

    Binance previously stated that it chose to withdraw from the transaction as a consequence of its due diligence on FTX and press reports concerning US investigations into the firm.
    What Factors Led to the Downfall of the FTX Exchange?
    Source: Twitter

    One of the biggest cryptocurrency exchanges in the world, FTX, has shut down, leaving a staggering $8 billion hole in its financial sheet. Numerous of its 1 million consumers currently need help to withdraw their money. The FTX group, headquartered in the Bahamas but managed from offices in America, filed for bankruptcy protection there on Friday.

    The two main factors which led to FTX's solvency are Binance and FTX's native token, "FTT," as far considered.

    Heavy Selling of FTT Tokens

    Zhao was in Lisbon last week when the FTX situation blew out. The Binance CEO was a presenter at the annual Web Summit, a meeting of the internet world's tremendous and sound. As usual, he defended the long-term future of digital assets.

    "I believe volatility will always exist. It's a trading floor. It's just like the stock market. "Who will invest if stock markets are not volatile?" he told the press.

    As it turned out, a new wave of volatility was coming.

    As Zhao addressed the charges concerning Alameda Research's financial sheet, a crypto hedge fund managed by FTX founder Sam Bankman-Fried. Alameda had billions of dollars in FTX's cryptocurrency, FTT, and was using it as collateral in more loans. Given their joint ownership, a decline in FTT's value would harm both companies.

    In the meantime, Zhao was unaware of the situation, which led to an internet jottering spat between the two crypto exchange giants, which divided opinions among the crypto and financial markets. The dispute took an ugly face turn which forced Zhao to end economic ties with Bankman Fried.

    Binance became a shareholder in FTX in 2019. Last year, it sold its stake in Binance for $2.1 billion in Binance's own stablecoin (BUSD) and FTT tokens. Binance had almost 30% share of FTT tokens, equivalent to $500 Mn at that time. Amid the verbal fight, Zhao announced on Twitter that Binance would sell off all its FTT tokens to save the company from a liquidity crunch.

    The Liquidity Crunch: A Gift for FTX from Binance 

    The move made horrors in the market sentiment, and soon after the announcement, the FTT token started bleeding blood. The token almost vanished 97% of its worth and still declining. The FTX's FTT holdings were kept as a reserve to help the company get out of such situations was locked. Several crypto exchanges delisted the FTT token and related pairs to avoid a liquidity crunch.

    As the fallout from the action spread throughout the crypto sector, Zhao tweeted, "We are not against anyone." However, in the same tweet, he noted, "But we will not support people who lobby against other industry players behind their backs." According to a source close to Binance, there was no malice toward FTX in the FTT sale.

    This lobbying aside looked like a reference to Bankman-Fried, who had spent millions of dollars financing US Democrat lawmakers and lobbying in Washington for tighter regulation of crypto trading.

    Related: FTX Soon to Be Inspected by California Fin-Regulators

    As rumors of a shortfall in FTX's balance sheet spread, Zhao abruptly pulled the plug, plunging Bankman Fried's business into a full-fledged catastrophe. Binance stated it could no longer proceed with the purchase after looking behind the hood.

    Bankman-Fried apologized to Twitter and stated that he had "f#ck** up, and should have done better." The future of FTX was now in severe jeopardy.

    The Bankrupt exchange is under scrutiny by regulatory authorities, and SBF shares updates on Twitter.