Dec 5, 2022
FTX AND THE WAVE OF BANKRUPTCY
What is FTX?
FTX Exchange is a centralized cryptocurrency exchange specializing in derivatives and leveraged products founded in 2018 by Sam Bankman-Fried. This platform allows users to buy, sell, and hold their digital assets. FTX is essential and significant since it processes the majority of cryptocurrency deals globally, along with its competitor Binance.
FTX begins its downfall throughout November 2022 due to the failure in asset management and transactions. The firm started burning from the inside when CoinDesk exposed a series of misdeeds by Alameda Research, a cryptocurrency trading platform also owned by Bankman-Fried. The main token of FTX is FTT, a utility token with the benefit of reducing transaction, and trading costs and a few other utility features on the platform. Concerned about the consequences FTX could have impacts on Binance, Changpeng Zhao, CEO of Binance, announced plans to sell the FTT tokens they are holding. This makes market sentiment unstable, and then investors withdraw their funds from FTX in panic.
An uncertain financial system coupled with the disintegration of the Terra protocol, which powered the TerraUSD stablecoin and its sister token Luna, activated a domino impact that precipitated numerous different companies to head underneath neath in the course of 2022. Together with the collapse of FTX, the snowball is starting to get bigger and bigger.
The contagious of bankruptcies in crypto firms
Now we know how everything started, short but enough to get deeper.
Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, Senator Sherrod Brown stated “The recent collapse of FTX is a loud warning bell that cryptocurrencies can fail, and just like we saw with over-the-counter derivatives that led to a financial crisis, these failures can have a ripple effect on consumers and other parts of our financial system. The cryptocurrency market’s continued turmoil is why we must think carefully about how to regulate cryptocurrencies and their role in our economy.”
The lastest shot of the contagious is Blockfi. Crypto exchange BlockFi filed for Chapter 11 bankruptcy on Nov. 28. Former FTX CEO Sam Bankman-Fried offered BlockFi a bailout of up to $400 million FTX credit facility during the liquidity crisis. The package came in the form of a bailout to help the distressed crypto exchange survive a liquidity crunch that arose originally from its exposure to the meltdown of the TerraUSD stablecoin, but it never came since FTX collapsed. According to a public bankruptcy filing, BlockFi asserts that they have things that are relevant to FTX and Alameda Research. “We do have significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US,”.
In Trenton, New Jersey, at the company’s initial bankruptcy hearing, BlockFi attorney Joshua Sussberg went to tremendous efforts to distinguish his client from FTX. BlockFi had loaned $680 million to FTX’s affiliated hedge fund Alameda Research as part of BlockFi’s broader lending business prior to the crypto crash in May, but FTX hasn’t returned this loan. Additionally, BlockFi traded cryptocurrencies on the FTX platform, and as a result of FTX’s bankruptcy, BlockFi had $355 million in cryptocurrency locked up.
In the end, BlockFi estimated that they had more than 100,000 creditors on their books and owed more than $1 to the three biggest. According to the document of the course, one of those debts is from the US Securities and Exchange Commission, amounting to $30 million that remains unpaid. Ankura Trust, a firm that represents creditors in difficult situations, is the biggest creditor of the firm and is owed $729 million.
The chain of fallen: Genesis Global Capital
After the FTX collapse, not only BlockFi but also the crypto trading company Auros Global, is the most recent to have liquidity issues after missing a payment on a decentralized-finance (DeFi) loan. FTX plays a central role in the crypto ecosystem, with the insolvency implicated in its affiliates and related digital assets. A good example of this situation is BlockFi.
Following the wave which is believed first created by FTX, on November 16, a few days after FTX went bankrupt, Genesis Global Capital’s lenders were unable to withdraw their funds. Now Genesis needs a bailout of at least $500 million to secure payments to customers. On November 21, Genesis said “no plans to file for bankruptcy imminently,”. The move to stop the transaction is said to be the burning smell of bankruptcy. If Genesis goes bankrupt, along with the meltdown of FTX, this will be a major blow to the crypto industry.
In the end, Genesis Global Capital was unable to avoid collapse along with FTX. That led to the suspension of transactions, and this is amplifying the crisis of confidence in the currency and increasing the likelihood of a rush on other lenders (BlockFi, and Voyager Digital). Hence, the contagion spreads like a disease.
The attempt to secure funding has been unsuccessful thus far, reports suggest, partly due to concern over the financial relationship between Genesis and other DGC-owned entities. Of the $2.8 billion in outstanding loans on the Genesis balance sheet, roughly 30 percent are made to either DGC or its subsidiaries, but inter-company loans are being treated with particular suspicion right now because of their central role in the FTX collapse.
The strike of FTX’s bankrupt on the cryptocurrency market
Bitcoin’s value has dropped from $20,000 per coin to $16,500 after the FTX exchange started having liquidity problems, making this the lowest point since February 2020. According to CoinMarketCap, the overall cryptocurrency market has decreased by over 5% in the past day. As a result, major firms and protocols with exposure to FTX are being forced to demonstrate their own liquidity. Given the comparable losses sustained by other tokens that relied on other exchanges at the same period, it is uncertain whether any of the bitcoin on the Solana system would be recoverable in the event that FTX went bankrupt.
Image 1. BTC price hitted 16,500 at the lowest bottom
Image 2. Crypto market cap after FTX filed for bankruptcy
Conclusion
The contagion shows no signs of stopping, and nothing can be predicted, especially crypto funds, which are also affected by FTX. so market participants need to remind when to trade, choose transparent projects with certified or public financial information
