Cryptocurrency is an alternative payment form created using encryption algorithms. It is unique from existing payment methods and assets in that it is decentralized - there is no third party managing your money, as there would be in a bank, and transactions occur entirely over the internet. Many types of cryptocurrency exist, including the ever-popular Bitcoin, Ethereum, and Dogecoin. Although cryptocurrency has many advantages including difficulty to counterfeit, it is also a highly-volatile currency with many risks involved. One of the major risks was exposed by the collapse of the cryptocurrency exchange FTX in November 2022.
Futures Exchange, popularly abbreviated as FTX, was created by Sam Bankman-Fried, a MIT graduate and former ETF (exchange-traded funds) trader and Gary Wang in 2019. The founders’ motives behind building the platform was to provide a safe and efficient platform to buy, sell, and enter derivative contracts in various cryptocurrencies. (Derivatives, which they specialized in, are financial contracts whose value relies on various market factors like currency exchange rates and interest rates). The platform quickly grew into the third-largest cryptocurrency platform in the world, largely based on intensive marketing, publicized acquisitions, and promise of high returns. Many buyers gravitated to FTX due to these claims, not realizing the risks the platform could pose to their financial assets.
Problems seemed to emerge when another cryptocurrency exchange, Binance, announced it would sell all of its FTX tokens (FTT). This sent FTX’s investors into panic mode, as they tried to collectively withdraw $6 billion worth of assets after the incident. As a result of the liquidity crisis, the value of FTX tokens rapidly fell more than 80%. To bail out the struggling FTX, Binance announced it would buy out the non-US portion of the company; however, Binance soon backed out over concerns about the mishandling of customer funds, creating a larger panic. Attempts by founder Bankman-Fried to handle this crisis by borrowing more money from the Bahamas were soon blocked and investigations began. By November 11th, he stepped down as CEO and was replaced by John Ray, a court-appointed specialist in recovering funds from failing corporations.
So what exactly went wrong? As investigations by the US Securities and Exchange Committee soon revealed, Bankman-Fried directed millions in investor funds into his private hedge fund, using them to buy luxurious properties, make political donations, and manage venture investments. Because of his mismanagement, the liquidity crisis occurred, the company was declared bankrupt, and FTX users lost millions in personal assets,
In December 2022, Bankman-Fried was arrested in the Bahamas and is currently in court over federal charges of fraud, money laundering, conspiracy to commit wire fraud and securities fraud, and campaign finance violations. Although he has pleaded not guilty to all charges and his outcome is unknown, this event has had lasting impacts on the crypto industry. Aside from the $400 million disruption to the crypto market, the incident has decimated user’s confidence in cryptocurrencies, setting the industry back by many years. It serves as a blatant warning to prospective investors of the high risk involved in this high risk-high reward industry, encouraging them to not be blindly swept up in the crypto craze.
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