Following Terra’s UST collapse, the year 2022 has recently shaken the crypto community with another major failure. FTX, one of the largest centralized cryptocurrency exchanges operating from the US and the Bahamas, filed for bankruptcy in November.
The event was accompanied by a successful hacking attempt that drained the exchange’s reserves by $600 million worth of crypto.
An interesting fact is that the market in general had been steadily losing its capitalization for a few months already. However, the collapse of a such large player has been particularly painful for many of its participants. In this article, we are going to make a quick analysis of what has happened and list the lessons that investors may learn from this collapse.
FTX background
Founded by a young entrepreneur Sam Bankman-Fried (SBF) in 2019, this cryptocurrency exchange platform managed to grow quite fast even despite not-so-favorable market conditions.
Thus, in 2021, it reported more than $1 billion in revenues, after having made only $85 million a year earlier. Such immense growth put the platform on equal terms with an indisputable market leader Binance.
The timeline of FTX collapse
The crypto market has seen many large projects destroyed over the past years. Yet, seeing FTX going out of business so abruptly came as a surprise to many. How did it come to such a dramatic end? Here’s how the events rolled out:
- Nov 2. The troubles begin as a large crypto media firm CoinDesk publishes controversial information about SBF’s Alameda Research trading company. According to the report, Alameda has strongly invested in FTT, a native token of the platform, revealing an unusually close connection between these two separate entities.
- Nov 6. Binance CEO Changpeng Zhao, also known as CZ, declares that he is selling off his FTT tokens.
- Nov 8. FTT drops from $22 to less than $5 in a course of a single day. At the same time, Binance promises to buy the falling asset so as to close the liquidity gap and eliminate the overall panic in the industry.
- Nov 9. Without prior explanation, Binance officially cancels the deal. Justin Sun, in turn, hints at some solution that may save the token but doesn’t disclose any details.
- Nov 11. FTX files for bankruptcy. Soon after the announcement, the platform gets hacked and more than $600 million worth of crypto mysteriously disappears from its wallets. Has it all been planned or has the exchange truly pulled an unlucky ticket? The time and official investigators will show.
FTX was not the first centralized exchange to face a liquidity crash this year. A few months earlier, a crypto lender Celsius dragged down its investors. Similar to the FTX case, Celsius claimed to have sufficient reserves to satisfy withdrawals, yet it was unable to stand against the liquidity crisis in the end. Hence the question remains open.
CoinMarketCap: FTT price represents a sad view to its holders now
How can investors protect their funds?
Selecting the right asset in the crypto industry is like a lottery. One can make a thorough market analysis, find a reputable project like FTX and invest in its native token and enjoy its steady growth. Yet, as practice shows, even large players may slip, and fail their supporters.
But what about other assets that investors were storing in their FTX wallets? History knows many cases of centralized exchanges compensating victims after successful hacking attempts.
However, this is obviously not the case now since FTX has already filed for bankruptcy.
The solution seems clear as many investors have already started withdrawing their funds from centralized platforms to their own self-custody wallets. Managing the security of your digital assets may be tricky, though, as it comes with its own pitfalls. However, there is an alternative way.
VAULTALP represents an intermediary solution offering the security of a regulated institution and the benefits of a self-custody wallet. With our help, investors who buy crypto get access to fully segregated cold storage wallets assigned to their own names. Thus, they don’t have to worry about liquidity crises, while enjoying the security of institutional-grade vaults with full insurance coverage.