We can all agree that 2022 has been a roller coaster ride of bad events that have resulted in people losing a lot of money, such as the NFT heist, which resulted in a $1.7 million loss; what happened to Luna in the crypto currency world; going as far as seeing companies downsize their employees, such as Meta and Twitter; the list goes on; and then the FTX bankruptcy makes you wonder, “What was the downfall of the popular exchange?”
On November 9, 2022, we witnessed the collapse of one of the largest exchanges, the FTX (crypto) Exchange, taking down the value of the best-known crypto currencies along with the equity of some very sophisticated players and the wealth dreams of small-time investors.
There are no investors, or better yet, rescuers, in sight. As Sam Bankman-Fried saved a lot of troubled crypto companies earlier this year, it was reported that he was in desperate search of an investor with a lazy $8 billion to keep the company afloat.
Many firms have devalued their FTX assets, or more like written them off totally, so it is going to be difficult for Sam Bankman-Fried to find investors at this point because FTX is already a sinking ship, one would think.
A number of reasons caused the downfall of the FTX exchange; They weren’t supposed to have fractional reserves, and they were never supposed to lend out your assets. They are an exchange, not a bank, and they are all supposed to have everyone’s funds covered at all times; anything aside from that puts them on the wrong path.
Fractional reserve banking refers to a system in which banks are obliged to hold a small percentage of the client’s deposit in its reserve. Banks use the amount left after reserve for various investment activities like providing loans.(Pureza, 2022)
Further, they inflated their balance sheets. This is what a little company called ENRON did—they used inflated balance sheets to get credit to gamble on crypto. FTX couldn’t pay back their creditors; FTX was insolvent while lying to customers that the funds were available.
They traded against their own customers, which might sound funny, but it is what it is. They were using data from FTX to buy and sell orders, plus their customers’ money that they took to move the market against the same customers. Apart from the crimes they committed, FTX is collapsing for no other reason.