Another Crypto Firm, BlockFi, Filed for Bankruptcy Due to the FTX Collapse

Before I delve deeper into this FTX saga, let’s go through some basic cryptocurrency terminology.

BlockFi is a crypto lending platform which users can use to earn interest on their crypto or take out a loan using their crypto as collateral.

On the other hand, FTX is a Bahamas-based cryptocurrency exchange which allows people to trade, buy or sell a variety of cryptocurrencies.

Sam Bankman-Fried launched his crypto trading firm, Alameda Research, in 2017. Two years later, Bankman-Fried and his team launched FTX, a crypto exchange platform with perks like low trading fees and advanced options for traders.

At its peak in 2021, FTX had over one million users and was the third largest crypto exchange by volume.

What Happened to FTX?

In early November, crypto publication CoinDesk released a report that found that even though Alameda Research and FTX are two separate companies, Alameda’s assets were mostly tied up in FTT, a coin that FTX had invented.

This brought into question FTX’s liquidity.

A few days later, when Changpeng Zhao, CEO of Binance (rival company of FTX) decided to liquidate roughly $530 million-worth of FTT, customers of FTX raced to pull out.

I would say this is a power move by the opponent. 

Over six billion dollars was withdrawn over 72 hours which FTX struggled to fulfill.

The value of FTT plunged 32%, but rallied once again with Bankman-Fried’s announcement on 8 November that Binance would buy FTX, bailing it out.

It seems more like Binance knew how to make use of the situation. 

On 9 November, Binance announced it was walking away from the deal, citing findings during due diligence, as well as reports of mishandled customer funds and the possibility of a federal investigation.

So, they just ended up exposing FTX? Maybe they had speculations that FTX might be using customer funds in other ways. 

With that, Bankman saw 94% of his net worth wipe out in a single day.

Bankman-Fried apologized the same day for the liquidity crisis said that “poor internal labeling” caused FTX to miscalculate leverage and liquidity leading to FTX’s non-U.S. exchange having insufficient funds to meet customer demands.

Well, is this actually the reason? Because a Reuter‘s report seems to have a different explanation.

The report stated that earlier this year, Bankman-Fried transferred customer funds from FTX to Alameda without telling anyone, after Alameda was hit with a series of losses.

How Does This Affect BlockFi?

FTX US and BlockFi are closely tied.

In July, FTX US provided the lender with a US$400 million revolving credit line, which came with an option to purchase BlockFi for $240 million. BlockFi has also given loans to now-bankrupt Alameda Research, Bloomberg reported.

As of now, BlockFi is preparing to file for bankruptcy within days according to people with knowledge of the matter.