The Untold Truth behind FTX's Bankruptcy: A Peek into the Crypto Chaos

It's official, FTX has filed for Chapter 11 bankruptcy protection in the United States on November 11. The unfolding catastrophe has sent a tsunami barreling through the cryptocurrency market, causing the collapse of more than 100 affiliated companies, lending platforms, and exchanges that were once thought to be unshakeable infrastructure providers to the industry.

When FTX, a once gigantic and leading firm of the cryptocurrency business dies, rumors that feed on the blood and flesh of the dead flourish like the organisms arising from the fall of a whale. At the moment shortly after FTX's bankruptcy announcement, Fazzaco has organized all the gossips and hearsay in an attempt to provide a reliable truth behind this crisis.

FTX: An Apprentice Who Wants to Replace the Master?

- From partnership to competition

There is a famous ancient fable in China about a great archer named Houyi, who had an apprentice named Pang Meng. The apprentice acquired the art of archery from his master. Yet one day, he believed that he had to kill the master because he wanted to be the greatest archer in the world. A familiar story sort of reminds us of Anakin and Obi-Wan in Star Wars, doesn't it? So, why don't we have a look at how the relationship between FTX and the world's biggest crypto exchange, Binance, spiraled down from being partners to competitors (for more information about the recent FTX crisis, please read Fazzaco Exclusive: FTX to Go Belly-up? A Timeline of What Happened​).

In fact, Binance was an early investor in FTX back in 2019. Under the investment agreement, Binance and FTX entered into a strategic partnership, while FTX would help build out the liquidity and institutional product offerings across the Binance ecosystem, including its exchange (Binance.com) and over-the-counter (OTC) trading desk. The partnership, sadly, didn't last long. Both sides announced their parting ways on July 21, 2021. On the other hand, FTX announced that it had completed $900 million Series B funding round at a valuation of US$18 billion, starting  on an unbelievable growth path and gaining demand from top VCs including Sequoia Capital, Temasek, Tiger Global, SoftBank and more.

- Did FTX plan to join hands with the Democrats to crack down on Binance?

As FTX grew to the second largest crypto exchange in the industry, it had come to the boiling point where it had to come to a showdown with Binance. Not only was FTX continuously gobbling up Binance's market share, it also attacked the Chinese background of Changpeng Zhao, a move of which many believed the intention of FTX was to pull down Binance from its leading position so that they could be the top player. After all, the situation between China and the US have been tense over the years, and Sam Bankman-Fried, the CEO at FTX, was reported to be the Democratic Party's second biggest donor for the 2022 US Mid-Term Election, with a total donation of 69 million USD. By the way, the Democrats once again secured the US Senate this year, which means President Biden successfully dodged the "lame duck" bullet. Hence, some believe that FTX was building the connection with the Democrats so that they could bring a crackdown on Binance.

Revenge from Binance? The Anakin vs Obi-Wan Duel

- Quick recap on FTX's liquidity crunch

As we all know, the quick death of FTX is essentially attributed to the exposure of the Alameda Research crisis about a week ago, where people found out that most of Alameda's assets were FTTs. According to the Fazzaco Timeline​, the news came out on November 2, and in the 6th, Changpeng Zhao, the CEO at Binance, tweeted that Binance would sell all their FTTs, something about $2.1 billion USD equivalent in cash. It was at this point that the situation got out of control.

Simply put, both FTX and Alameda were owned by Bankman-Fried. After FTX issued FTT, Alameda bought it at a low price from behind. Alameda acquired FTT coins at a low price, used them for financing, and then loaned money from FTX where the loan was actually the customer funds. In this way, FTX transferred 10 billion customer funds to Alameda. At first, no one knew about this matter, and FTX could keep playing this game for a longer time as long as they could somehow kept everyone still in the dark.

But with the Alameda news coming to light, a run on FTX customers was triggered, and they were unable to get enough money back from Alameda to cover the withdrawls, which led to the bankruptcy situation we are now seeing.

- Binance: Determined to bring FTX down

Some people suggest that what FTX did previously prompted Binance to make up their mind to take down FTX for good. Because the competition among crypto exchanges have already shifted to developed countries in Europe and North America ever since the cryptocurrency crackdown in China, and the US market is a must-have market. So for Binance, the competition with FTX might a life-or-death battle since FTX is building their connections in the US government.

Then, we saw how Binance did it: They first tweeted about liquidizing all of their FTTs, setting off a trust crisis; followed by "tricking" Bankman-Fried into believing that Binance would come to rescue, some people even believed that the young FTX CEO with an Afro hair, was genuinely convinced, and he told them everything about how they inappropriately moved $10 billion customer funds from FTX to Alameda; then Binance backed out, FTX died.

Cryptocurrencies Might Be Limited, But Greed Has No Boundaries: A Lesson to Learn

In recent years, the cryptocurrency industry has been in turmoil. Behind the crazy hype, the blockchain-based industry is no longer purely technological. With all the money pouring in, virtual coins are now labeled with greed. Different types of new coins with a random story keep popping up everyday and becoming a trend. In a lot of times, cryptocurrencies are a tool of a group of people to rob money from another group of people.

Back then, the early makers of cryptocurrencies were a bunch of tech-savvy guys who simply wanted the change the world with decentralized technologies. But unlike Bitcoin with a limited number, greed has no boundaries. And with the bubble growing, it is only a matter of time before it pops.

This winter will be extremely hard for the cryptocurrency industry as the ripple effect of the FTX bankruptcy affects all of us. Stay tuned to Fazzaco, and we will keep an eye on the latest updates of the crypto industry.