Crypto Crash November 2022 & the collapse of FTX Empire: What caused it?
If you surf through the market stats, the table will appear just red to you and as the colour signifies, it’s no good for the market, the market is facing a red time. In the last few days, or a week to be more precise, almost all the coins have suffered a tremendous fall, whether it is Bitcoin with 24% fall in the 7 days and Ethereum with almost 25% fall, or upcoming and growing coins such as Solana with almost 61% fall or Dogecoin with 31% fall.
Every coin is collapsing resulting in a huge panic among the investors and major companies too.
But the coin facing the biggest fall in the past 7 days is the protagonist of the story named Crypto Crash November. It is FTX Token (FTT) facing a fall of 92% in just 7 days.
Now seeing such a condition of the market, there exists a major section of people unaware of the details and reasons for such a crash. So let’s dig in to know more about it.
What we are going to learn?
Crypto Crash and FTX: The story Behind it
Setting up the background, let’s know the 2 main characters of this story and the place where it all started.
We have the CEO of Binance Changpeng Zhao who goes by the name CZ on Twitter and on the other hand we have the former CEO of FTX, Sam Bankman-Fried who goes by the name SBF on Twitter.
For new crypto enthusiasts let me introduce Binance and FTX to you, they are the two biggest crypto exchanges according to market share. And as you might have guessed again, as usual, it all starts with a tweet.
On November 6, CZ tweeted about the FTX where he mentioned the incident of exiting the FTX equity which was redeemed to FTT and BUSD equivalent to $2.1 Billion.
Later, he stated that he came to know some interesting facts about FTT and hence wants to liquidate the same. He also reveals the strategy of liquidating the token and expressed his care for market stability. He wouldn’t sell FTT all at once just to prevent congestion and disgrace of the market, he would regulate the token with time for the sake of good market liquidity.
Many predicted that he is doing it for the sake of removing competition from the market which he cleared in the next part of the tweet. Also, he cleared that he holds no personal grudges against his competitor.
Reasons behind the fall of FTT
- Declined Offer by CZ
Following the above incident, Alameda Research, which is owned by none other than the FTX itself, offered CZ a deal. The deal asks for all the tokens which CZ wants to sell at a rate of 22 USD per token which is more than the market price at that time which was 17 USD. CZ rejected the deal and remained on his stand of selling the token in the market, not to Almeda Research.
- Balance Sheet Analysis
Earlier in this event, a crypto news and analysis website named Coindesk, in one of its reports analysed the Q2 balance sheet of FTX and the results were quite shocking. It said, FTX holds assets worth 14.6 Billion USD out of which 5.8 Billion USD equivalent FTT, 1.2 Billion USD equivalent SOL, 3.37 Billion USD from other crypto holdings and equity worth 2 Billion USD. when it comes to the cash holdings, it just holds 134 Million USD, which is significantly a small fraction of total asset holdings. Talking about liabilities, it costs 8 Billion USD out of which & 4 Billion USD is just loans. In other words, FTX assets were illiquid.
The balance sheet review of the company combined with the tweets of CZ created a sense of fear in the market resulting in a tremendous fall of FTX which triggers the fall in the market and leads the market to the place where it is today.
Also, let us take the fact into consideration that 88% of equity held by Almeda Research is just FTX tokens which points to the case of Flywheel. For those who are new to this term let me explain Flywheel to you.
This is a situation where a creator creates the token and then pumps the token price which eventually results in a gain to the balance sheets of the company. Now, the company shows this gain to its investors and raises cash through its equity sales and loans. Once, it receives the money it again uses that money to pump the price of the token and again the whole process repeats in a cycle. This wheel of the event is said to be Flywheel.
The data reveal indicated the company used such a strategy which again marks the trust bar low for the investors and users. The claim of flywheel got stronger after the insisted deal of Almeda Research to CZ at a higher rate than the market.
- Concentration of FTX
Data shows that 93% of FTX Tokens are just held by 10 wallets which indicates its saturation and which again creates a fear of its possible disappearance, bankruptcy or market manipulation. It again put a red flag on the company.
All the events mentioned above are just a bunch of red flags coming from the FTX. Although the CEO of FTX, SBF, commented on the situation as some competitor rivalry he couldn’t gain the support of the market and is suffering a huge loss.
The effect of FTT collapse
Although the root cause of Crypto Crash November is a sequence of events with FTX and its CEO as protagonists it is not limited to FTT only. The effect of the same is like a wildfire spreading real quick.
- Due to the balance sheet revelation, all the stated coins which act as an asset to the FTX suffered a tremendous fall. SOL and SRM are some other SAM coins. Moreover, the coins and projects having any kind of connection to FTX or Almeda Research or Sam Bankman-Fried are looking down due to the loss of trust among the users in the name of the mentioned.
- As it uses the flywheel strategy, the fall in prices of FTT would result in the fall of assets of the company and its child companies as well. If the fall goes more severe, Almeda Research as well as FTX might progress on a path to bankruptcy. But before that, the investors will lose trust in the company and they might withdraw their investments.
- Not only the FTT, SOL, SRM and coins linked to FTX are facing a downfall but other coins which have no significant connection such as BTC, ETH, etc. are collapsing as well. Hence, the whole market is facing a huge crash.
- Many web 3.0 projects were holding their treasuries with FTX, and now that their funds are stuck, the project’s future is uncertain. Many of the project owners are keeping this a secret as revealing this may cause more damage to the project. Star Atlas’ is one such project whose cash runway got sliced by half by the FTX fiasco.
- VCs and angel Investors who invested on FTX have set their RETURN as zero. The list includes the likes of Sequoia Capital.
- Individual users, who deposited their life savings lost heavily, some of them their entire net worth.
Crypto November Crash: Conclusion
The November crypto crash may continue and might take some new twist, but the only conclusion that could be drawn from the situation right now is, that crypto investors and users across the globe are in fear right now and nobody knows what would be the lowest of the market this fall. It would be interesting to see if FTX could cope with the fall it triggered or if something different is waiting for it. This situation might seem like a nightmare for the CEO of FTX, Sam Bankman-Fried, as he could be traced back to the root of Crypto Crash November 2022, which also is resulting in the revelation of other facts related to him from the past which is making it worst for him.