The collapse of FTX shook the crypto world
In just one week, FTX went from being the third largest cryptocurrency exchange in the world to filing for Chapter 11 bankruptcy in Delaware.
The sudden and rapid drop in FTX came after the company, facing a liquidity crunch, agreed to sell itself to rival Binance for an undisclosed amount. Clients left the exchange after they became concerned about whether FTX had enough capital.
But Binance, the world’s largest cryptocurrency exchange, backed out of the non-binding deal after examining FTX’s ledgers, after which it became clear the smaller exchange’s problems were too big to fix.
Earlier this week, CEO Sam Bankman-Fried warned investors that without the inevitable $8 billion in cash injection, the company may have no choice but to file for bankruptcy.
Here’s everything you need to know about bankruptcy.
What is FTX?
FTX is a cryptocurrency exchange, which means that it allows consumers to buy, sell, and store digital currencies such as Bitcoin and Ethereum, as well as other digital assets such as NFTs.
Headquartered in the Bahamas, the company was founded in 2019 by Bankman-Freed. As of 2019, FTX had over 1 million users.
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Until this week, FTX and Binance handled the majority of all crypto transactions worldwide. according to CoinMarketCapindustry data tracker.
Who is Sam Bankman-Fried?
Bankman-Fried is a 30-year-old entrepreneur who has built FTX into a $32 billion empire over the past three years. Until Friday, Bankman-Fried served as CEO of FTX.
A regular on Capitol Hill and a prominent political donor to the Democrats, Bankman-Fried is also a major supporter of the cryptocurrency industry. But the collapse of FTX has received intense scrutiny from the Biden administration and leading Democratic lawmakers, who have criticized FTX and called for greater oversight of the crypto industry.
“I screwed up and should have done better,” Bankman-Fried wrote on Thursday.
Bankman-Fried’s net worth has all but evaporated: As of Monday, he was worth an estimated $15.6 billion, according to the Bloomberg Billionaires Index, making him one of the 100 richest people in the world. In March, the index valued it at about $26 billion.
But on Friday, Bloomberg estimated his net worth at about zero.
Why is FTX declaring bankruptcy?
FTX, short billions of dollars, is seeking bankruptcy protection after the exchange faced the cryptocurrency equivalent of a bank run. FTX, its hedge fund subsidiary Alameda Research and dozens of other companies filed for bankruptcy on Friday.
Although Binance and its CEO Changpeng Zhao initially agreed to step in and acquire FTX, the company reversed course, citing reports of “mishandling of customer funds and alleged U.S. agency investigations.”
“At the beginning, we hoped we could support FTX clients to provide liquidity,” Binance wrote in a tweet on Wednesday. “But the problems are out of our control or ability to help.”
Filing for Chapter 11 bankruptcy will allow FTX to continue operating while the company develops a plan to repay its creditors.
How will this affect the crypto industry?
Cryptocurrency lender BlockFi announced on Twitter late Thursday that it was “unable to conduct business as usual” and was suspending customer withdrawals as a result of the FTX collapse.
In a letter posted to its Twitter profile late Thursday night, BlockFi, which was bailed out by FTX Bankman-Fried early last summer, said it was “shocked and dismayed by the news of FTX and Alameda.”
The company ended by saying that any future communications about its status “will be less frequent than what our customers and other stakeholders are used to.”
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Bitcoin fell immediately after the letter was published, shedding about 5% before climbing back above $17,000 overnight.
The original cryptocurrency, bitcoin, hovered around $20,000 for several months before FTX problems became known this week, causing it to briefly drop to $15,500.
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