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8 Facts About FTX Collapse Simplified Until Even a 5YO Would Understand

2022-11-12 , 11:36 pm

The FTX collapse might have taken some people by surprise, with them reading about it for the first time today (12 November).

However, for people invested in cryptocurrency, it’s an expected outcome; the only news is that it’s finally filed for bankruptcy.

For the non-crypto-bros, that might not make sense since it’s a cryptocurrency exchange, which means it’s kind of like a middleman, so why would it go bankrupt?

It’s akin to saying that a property agent has gone bankrupt because of his clients: where’s the logic in that?

Well, read on, Mr Five-Year-Old.

What is FTX?

First thing first: What is FTX?

Simply put, think of it as a bank for cryptocurrencies: if you want to buy Bitcoin and “store” it, you need to buy it from a firm like FTX, which are cryptocurrency exchanges.

There are many cryptocurrency exchanges in the world, and FTX is one of them. It’s also one of the largest in the world.

So, if they’re just helping you to buy and hold cryptocurrencies, why would they go bankrupt then?

Banks Don’t Keep Your Exact Cash in a Biscuit Tin

Since you might really be five years old, you might think that when you deposit $10 to a bank, the bank would put that $10 in a safe, and would take it out for you when you want to withdraw it.

Don’t be naive because that’s not how the world works.

The money is used by the bank to earn more money instead; this means when you deposit $10 to ABC Bank, ABC Bank might not have $10 in their accounts the next day.

Which is why if everyone decides to withdraw their money at one go, the bank would get into trouble.

Which was what happened to FTX.

People Suddenly Wanted to Withdraw Their cryptocurrency

Earlier this week, many people did just that: they wanted to withdraw their cryptocurrencies from FTX for reasons that I’ll be simplifying later.

This led to FTX doing the unthinkable: on 9 November, they announced that they would not be processing withdrawals.

That was when people knew shit has hit the fan, but suffice to say, there’s nothing they can do except to wait for today’s impending news: that FTX is filing for bankruptcy.

Which leads to the question: Why?

What caused the mass withdrawals?

There are actually several reasons.

A Beef With Binance & Its CEO

Binance is another cryptocurrency exchange, and it’s the largest in the world if we look at trading volume.

Its CEO, Changpeng Zhao, also known as CZ since ang mos won’t know how to pronounce Zhao, had actually invested in FTX during its early days, holding 20% of FTX then.

FTX is founded by Sam Bankman-Fried and Gary Wang, but you just need to remember Bankman-Fried, who is also known as SBF to many.

I’ve no idea why crypto bros have acronyms as names.

As FTX grew, it started its own token, too. It’s very common for cryptocurrency exchange to have their own cryptocurrency and for them to market it aggressively, too. FTX’s cryptocurrency is FTT, and at its peak, it’s worth over USD$70.

So, with FTX’s fast growth, SBF decided to buy back certain FTX shares that CZ has, and he did that not with cash, but with FTT (not fully, though).

But this means CZ holds a lot of FTT.

Also, FTX’s growth is also attributed to many high-profile investors, one of which is our very own Temasek.

Everything looks good for FTX, right?

It looks so good, it even bailed out some crypto firms.

But all good things come to an end.

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Alameda Research

Remember how banks took your deposit and tried to make money with it?

They use many different ways: trading it in the stock market, investing it and of course, lending it to your friends to buy their BTO so as to earn from the interest.

These money would be used, but they’re usually used professionally and at a very low risk.

FTX do the same thing, just that they used the money to trade with a firm called Alameda Research.

They might have done something else but we won’t know.

That is a little chim but let’s just say that Alameda Research isn’t good news.

The firm is SBF’s company to trade cryptocurrencies to earn money, and on 2 November, a bombshell article was published: it’s said that a lot of money in Alameda Research is being held in FTT.

Yup, FTT, FTX’s own cryptocurrency.

It’s dangerous, because it’s like a country holding on to just its currency—what if the currency suddenly collapse? Printing more of it won’t help.

Well, this was what happened to FTT as people lost trust in the firm.

Binance Not Happy

Remember who else holds many FTT?

CZ.

And in Elon-Musk-style, he sold all FTT coins he had: back then, it was worth USD$580 million.

With that, the dominoes started to fall, and people panicked and mass withdrew their cryptocurrencies from FTX, leading to today.

Binance Came to the Rescue…Not

Initially, Binance has said that they were going to bail out FTX.

However, in the last minute, they backed out, saying, “Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”

So, is it is all CZ’s doing?

CZ: No Lah Not My Fault

In an email sent to his employees, which has since been made public, CZ stated that he didn’t master plan FTX’s collapse, adding that its collapse “is not good for anyone in the industry.”

He also urged his employees not to buy FTT tokens now (well, of course).

Since FTX’s collapse—or to be more specific, since FTX’s fate hung in the balance—prices of all cryptocurrencies have dropped; Bitcoin, for instance, was trading above USD$28,966 early this week, but dropped to USD$23,037 now.

And oh, do not attempt to head to FTX website now. It’s alleged that it’s since been hacked.

In addition, this is also why the Singapore authorities are setting new rules for investing in cryptocurrencies in Singapore. Watch this to know more about the rules: