Why did FTX collapse? The story of the collapse

Two weeks ago now, the famous crypto exchange FTX and its native token FTT collapsed precipitously, reaching 85% losses with severe liquidity crises: but why did the exchange collapse?

All of this clearly had serious repercussions for the entire crypto market, leading to large losses for other prestigious coins as well, such as Bitcoin and Ethereum. 

But why did FTX collapse in this way? What happened and how is it possible for such a giant to have gone so far? 

Let’s proceed in stages, including a look at the latest news surrounding FTX and trying to understand how the exchange, whose CEO was Sam Bankman-Fried, got to this point. 

The latest Twitter news: why has FTX collapsed?

Yesterday’s tweet from the official Bitcoin Archive account reports the following: 

“FTX new CEO John Ray: FTX doesn’t know exactly how much cash it has or how many people work for the company.”

As can be guessed, after the disaster that occurred while he was CEO of FTX, Sam Bankman-Fried no longer plays any role within FTX, FTX US or Alameda Research, and he does not speak for these companies. 

This is the statement a few days ago by the new CEO of FTX, John Ray. He took over as CEO on 11 November, following FTX’s declaration of bankruptcy. Ray is best known for overseeing the bankruptcy of former energy giant Enron, at the time the largest corporate failure in US history.

However, not even the exchange’s new CEO for now can provide enough reassuring news regarding a possible FTX recovery. Indeed, as the latest tweet states, it is yet to be clearly understood how much money or employees the company has. 

Another interesting tweet that also emerged yesterday is a press release from FTX’s official account, which reads: 

“FTX Group has established Kroll as its claims agent, and all official documents filed with the U.S. Bankruptcy Court can be found online at https://cases.ra.kroll.com/FTX/.”

Kroll is an American corporate investigation and risk consulting firm founded in 1972, based in New York City. And, as it turns out, it is now officially FTX’s agent for claims and official documents. 

The hope is that, under the supervision of a prestigious firm like Kroll, at least all future FTX official documents will be handled in the best possible way. 

Let’s proceed in steps: why did FTX collapse? Where does the story begin?

It all started with an official CoinDesk report that read: 

“There are more FTX tokens among its $8 billion in liabilities – $292 million of locked FTT.”

Later, the CEO of Alameda Research, Caroline Ellison, offered to buy Binance’s FTX tokens (FTT) at $22 per token. What followed was undoubtedly one of the craziest events in cryptocurrencies: the collapse of FTX and Alameda.

The question arises at this point: were the causes of FTX’s collapse to be found in external factors was it simply negligence on the part of the exchange? 

Leaning on hard data, it is possible to put together an analysis to unite the fallen dominoes of FTX and Alameda. In other words, through transaction data and the cryptographic wallet activities of the entities involved, it is possible to attempt to reconstruct what happened. 

At the heart of the study, is a theory-based approach whereby a list of wallet balances and transaction volumes processed through these wallets represent the focus of the question.

Specifically, the following time frames should be considered. First, through May 2019: Alameda’s first on-chain involvement in FTX. In August 2019 and January 2020: FTT as the illegitimate child of FTX-Alameda. 

May 2022 to July 2022: study of Alameda’s reaction to the collapse of UST and its aftermath, as well as a potential loan granted by FTX with FTT as collateral. September 2022: recent events and the fall of FTX and Alameda.

FTX and Alameda colluded from the beginning? Here’s what we know 

Alameda and FTX were both founded by SBF and have ongoing collaborations. However, FTX is said to have really started raising money for Alameda and the two have been colluding from the beginning.

Apparently, the first connection between the two dates back to May 2019, the month when Alameda on-chain was first involved with FTX. Indeed, Alameda was one of the liquidity providers on FTX, if not the first. However, this raises a question about how involved the two entities were. 

Specifically, it can be seen that Alameda’s portfolio interacted with FTX even before it was launched in May 2019; besides other CEX addresses, it was the only clearly identifiable counterparty.

Then, when looking at the period between July 2019 and January 2021, it can be observed that at the launch of FTT, FTX’s native token, there was an early distribution. FTT, as a utility token for the FTX platform, does not entitle users to a share in the platform’s revenue nor does it represent a share in FTX. 

Thus, it is not supported by or gives control over FTX’s governance decisions or treasury. Given the ties between Alameda and FTX, it is not surprising that Alameda was in the seed round of FTT. However, one wonders if these were more than just investors.

Specifically, two days before the official listing on FTX on 29 July 2019, Alameda received FTT 5 million in three transactions directly from the FTX Deployer (who minted FTT) into its FTX account. 

In addition, 20 million FTT were deposited by the FTX Deployer into an FTX-related FTX depository wallet on the day of listing. Those were the entirety of the FTT outstanding at the time. About a week after the listing, on 5 August 2019, 5 million FTT were sent back to the FTX Deployer.

Multiple interpretations: is Alameda potentially innocent or a perpetrator?  

Everything previously reported could mean that the five million FTT returned to the FTX Deployer were the same as those deposited in the Alameda FTX account. As a matter of fact, the amounts matched perfectly. 

It is highly unlikely that any other party except FTX itself had that many tokens at that time, about 25% of the circulating supply. As a seed investor, Alameda technically should not have fully transferable tokens at the time in the first place. 

At this point, there are two possible interpretations on the issue, Alameda’s involvement, and why FTX collapsed. A first, very optimistic one, would be that Alameda was involved in the market-making of FTT tokens. However, this theory does not explain why the funds were sent back only after a few days.

The other would be that Alameda profited from the ICO participants by selling the tokens before other investors’ tokens were unlocked and buying them back at a lower price later to return to FTX.

Thus, did Alameda use the unrealizable accounting value of its FTT to borrow funds?

The moment of the exchange’s collapse 

Just before FTX collapsed, it appears that on 28 September Alameda received FTT 174 million ($4.1 billion) from the FTT ICO contract and sent it to the FTX Deployer. 

Thus, between 31 October and 1 November, an unusual list of continuous stablecoin transfers from FTX International and FTX US to Alameda’s Circle, Binance, and FTX portfolio was identified. 

These stablecoins included USDC, BUSD, TUSD, PAX, and totaled $388 million. 

2 November was the fateful day, when CoinDesk publishes a report on Alameda’s balance sheet, revealing that $5.8 billion of the $14.6 billion in assets on Alameda’s balance sheet would be in FTT and other tokens in the Solana ecosystem. Most of the equity in Alameda’s business was actually FTX’s centrally controlled token, FTT.

Then, on 6 November The CEO of Binance announced that they had decided to liquidate the remaining FTT on their books, worth ~$584 million in FTT. From that point on, a chain reaction set in, which, as we know, led to the liquidity crisis for FTX and its subsequent irretrievable collapse.