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EconomyBusinessCrypto collapse at FTX explained

Crypto collapse at FTX explained

It will take time and several US federal inquiries to fully fathom what happened behind the scenes at the FTX crypto exchange, but here’s a simple explanation

How can a $ 32 billion company evaporate overnight? Anyone witnessing the sudden collapse of FTX, a hot cryptocurrency start-up that fell into bankruptcy last week, may be confused. It will take time to fully understand what happened behind the scenes at the Bahamas-based crypto exchange, FTX — and many federal inquiries.

But here’s the simplest explanation that The New York Times offered: FTX allowed people and companies to buy and sell digital currencies, with billions of dollars of customer deposits. FTX founder Sam Bankman-Fried, meanwhile, created an investment called Almeida Research that trades cryptocurrencies. Businesses should have been different, but this year, Almeida needed cash and apparently has customer deposits dipped in FTX. Then, this month, FTX customers became worried about their deposits and rushed to withdraw them, setting up a bank run and pushing FTX into bankruptcy.

The apparent mix of funds between Almeida and FTX is questionable. It could lead to criminal fraud charges and lawsuits. The Securities and Exchange Commission (US SEC) and the Justice Department are investigating the affair.

The following explains why the dissolution of FTX matters – it is more than just an individual’s financial nightmare.

Crypto became mainstream during Covid-19 pandemic; regulations still don’t work

Cryptocurrencies were part of the overarching investment frenzy — which included meme stocks, trading cards, irreplaceable tokens (NFTs) and sneakers — that got people pursuing speculative investments over the years. But not everyone understands the level of risk involved.

If a bank fails, the government of the day may bail it out. But crypto is largely unregulated, buyers beware. Hacks cannot be reversed; wrong funds cannot be obtained by calling customer service, and a failed crypto exchange is unlikely to get a government bailout. Investors have some protection.

Risky bets in many crypto projects that were once deemed valuable have already caused a “death spiral” this year, leaving investors worth billions of dollars. But FTX and Bankman-Fried stand out. He appeared on the magazine’s cover, advertised for regulators, raised his profile in philanthropy and politics and even sponsored a sports area in Miami. He made hundreds of investments in small crypto projects and aggressively salvaged unsuccessful ones.

Evangelists for crypto-communications and their underlying technology promote them as investment vehicles that eliminate the need for trust in people and institutions. But Bankman-Fried made a point of boosting trust: from investors, journalists, politicians, and charities. Now he is untouchable, and he has brought the crypto industry under scrutiny.

FTX collapse associated with extensive technological industry withdrawal.

FTX fell apart amid extensive pullbacks to the technology industry. Tech stocks have fallen. Venture capital funding is drying up. Nearly 800 tech companies have laid off more than 120,000 this year, with cuts made on Meta, Amazon and Twitter.

Difficult times in technology can be traced back to interest rates for borrowing. For more than a decade, rates were low, prompting investors to pursue risk and put money into high-growth tech companies. Now, rates are rising, just as covid-19 pandemic-fuel growth has faded over the past two years. The rate hike has hurt the tech company’s valuation and access to capital — with a focus on crypto.

Lot more to come

FTX has a bankruptcy filing list of more than 1 million creditors. Apart from those who used the platform to store their cryptocurrency investments and investors directly supporting the company, the assets of many funds and crypto start-ups were locked there.

“Investment managers who dabble in crypto should really consider whether their retirement plans should have relatively new, relatively unproven, relatively unregulated assets,” said Marcia Wagner, the founder of Wagner Law Group, a firm focused on employee benefits. “There are certain types of assets that are clearly not related.”

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