Last Tuesday, FTX, the second-largest cryptocurrency exchange in the world, closed withdrawals, blaming “severe liquidity problems”. By Friday, FTX had filed for bankruptcy.
After a stupendously profitable asset bubble in 2021, the cryptocurrency industry suffered harsh reversals in 2022. A string of high-profile collapses – Terra-Luna, Three Arrows Capital, Celsius Network, Voyager Digital – lost investors a fortune, tanked prices and demolished market confidence. But FTX’s sudden collapse caught almost everyone by surprise.
Why did one of the world’s biggest cryptocurrency exchanges just collapse?
FTX was founded in 2019 by Sam Bankman-Fried, the child of two Stanford academics. He had worked at quantitative trading firm Jane Street Teuntil 2017, when he struck out on his own with his Alameda Research crypto hedge fund. With Alameda as its market maker, FTX rapidly became one of the most popular crypto exchanges. Traders loved its complex futures and options products. A more restricted branch for US customers, FTX US, opened in 2020.