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Contagion. Remember this word. After all, it will likely characterize the events that play out over the next few days now that the troubled crypto exchange FTX has filed for bankruptcy, and Bitcoin is, predictably, crashing.
Press Release pic.twitter.com/rgxq3QSBqm
— FTX (@FTX_Official) November 11, 2022
As per the company's press statement, FTX and its affiliates have now "commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code." Moreover, FTX's founder, Sam Bankman-Fried (SBF), has stepped down as the CEO.
For those who might be unaware, FTX essentially suffered a bank run when Binance announced that it would dump its holdings of the FTT token due to the outsized exposure that Alameda Research – the trading arm of FTX's founder Sam Bankman-Fried (SBF) – maintained to this synthetic coin on its books, which, according to Binance, amplified the risk around the FTT ecosystem. Bear in mind that FTX incentivized its users to hold the FTT token by offering attractive discounts on trading fees along with a host of other rewards. The exchange maintained FTT's value by using a third of its trading commissions to buy back FTT coins, which were then burnt.
In reality, FTX and Alameda were running a Ponzi scheme where Alameda was able to acquire FTT coins at very low prices (through pre-mining, etc.) while FTX artificially inflated the coin's price via regular burns. Alameda then posted its FTT holdings as collateral to borrow over $6 billion in FTX client funds. These client funds were used by Alameda to place leveraged bets. However, the gameplay ended when Binance's decision to dump FTT unleashed cascading liquidations that pummeled the coin's price. With Alameda's collateral crashing and FTX experiencing elevated withdrawal requests, the exchange has found itself on the brink of bankruptcy.
We reported yesterday that FTX had been actively negotiating with Justin Sun, the founder of blockchain-based, entertainment-focused digital platform Tron, after bailout talks with Binance collapsed the day before. According to Reuters, FTX was seeking a $9.4 billion package, with Justin Sun contributing $1 billion to this bailout attempt. Another $1 billion was expected to come from the OKX crypto exchange. Tether was also expected to contribute $1 billion, while a consortium of investment funds was slated to provide $2 billion. The residual $4.3 billion was to be coughed up by other investors, including Daniel Loeb's Third Point hedge fund.
FTX also finalized an interim "special facility" with Tron yesterday to "allow holders of TRX, BTT, JST, SUN, and HT to swap assets from FTX 1:1 to external wallets.
However, Tether later denied any involvement with FTX's bailout. As of now, it remains uncertain how far Justin Sun will go to rescue the troubled exchange. Of course, the initiation of bankruptcy proceedings suggests that FTX has likely failed to secure the requisite funding.
In our post yesterday, we compiled a comprehensive list of entities that will be affected should FTX become insolvent, as is the case now. For instance, Sequoia Capital has already written off its $210 million stake in FTX. Other investors include the Japanese giant SoftBank, Singapore's Temasek, BlackRock, Ontario Pension Fund, Tiger Global, Circle, Paradigm, Ribbit, MultiCoin, VanEck, Thoma Bravo, Alan Howard, etc.
Meanwhile, Bitcoin is again at the $16,000 price handle. This bear market has further room to grow.