Crypto is complicated, and the downfall of the crypto-exchange FTX is even more complicated. It’s been making a lot of headlines lately, and there are still a lot of un-answered questions about what exactly happened. Heres our quick summation of what FTX was, and what seems to have led to its dramatic collapse.
What Is Cryptocurrency? Quite simply, cryptocurrency is ‘digital money’. It isn’t directly linked to any country’s currency, and many of these ‘crypto coins’ allow un-traceable payment transactions. For years they were used by more fringe online communities, sometimes for illegal / illicit purchases, but in recent years they’ve gone mainstream.
What Is FTX? FTX is (was, I guess) a cryptocurrency exchange. Think of it like a mix of PayPal and Robinhood, but for crypto, where you could use their platform to make purchases using digital currency, as well as simply buy various crypto currencies for future purchases, or long-term investment.
What Led To FTX’s Collapse? This is the $10billion question. Currently the company is being head by a new CEO (its original CEO was recently arrested) and they have been releasing information to regulators and bankruptcy stakeholders. To understand a bit more fully, its important to note that the original CEO also owned a hedge-fund. What seems to have led to the collapse of FTX, at least in part, is that FTX was ‘loaning’ customer money to this hedge-fund and not properly recording these loans. As the hedge fund continued to flounder financially, they were not able to re-coup the funds (which customers assumed were used to purchase the crypto they had purchased through FTX) so when customers attempted to sell their crypto and withdraw cash, FTX didn’t have the money. This led to a death-spiral of more and more customers trying to withdraw funds, and being unable to.
This is an ongoing legal case, and so far only the original founder, Sam Bankman-Fried, has been arrested or accused of wrongdoing, so things are likely to change in the coming weeks.