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  • Frank Tian

💸 The FTX Saga

FTX once played the central bank role in the crypto world.

Now it went bankrupt.

The aspiring new financial world realizes it still needs to figure the orders out.

🟥 What Happened

FTX is a major crypto exchange - a CeFi (centralized finance) entity in the crypto world.

It moved a large number of clients' funds to its trading company Alameda for high-risk bets.

How FTX justified the fund transfer is to use its own tokens as collateral for Alameda to borrow funds.

The problem is the tokens have no real assets to back it up. There is not much worth of the corresponding collateral.

Once a report surfaced on FTX/Alameda’s balance sheet problem, it triggered a bank run.

The liquidity crisis led FTX to bankruptcy within days.

🟧 The Impact

The full impact is still playing out.

It most likely will remain limited to the crypto world, as many crypto projects are built on top of each other.

That explains why FTX was busy rescuing crypto projects earlier this year. It knew everything must be kept afloat.

Some traditional FIs invested in crypto projects but the percentage weight typically is small.

🟦 Tokens and Value

👉 The FTX saga illustrates once again the tokens have no intrinsic value. They could have utility value - only if they can enable value-generating activities outside the crypto world.

👉 The perceived value (price) in an illiquid market could evaporate quickly. This applies to non-crypto assets as well - look at today’s housing market.

👉 Without transparency forced by regulations, the consumers (creditors to the exchange) again are the last ones to find out the risk with their money, when it is too late.

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