In a dramatic turn of events that has sent shockwaves through the cryptocurrency world, FTX Trading Ltd., the Bahamas-based exchange helmed by wunderkind Sam Bankman-Fried, files for Chapter 11 bankruptcy protection in the U.S. late on November 11, 2022. The filing, which covers over 100 affiliated entities including Alameda Research, comes after days of escalating chaos triggered by revelations of deep financial ties between the exchange and its sister trading firm.
As of November 12, customers continue to flood the platform with withdrawal requests, exacerbating what insiders describe as a full-blown liquidity crisis. FTX, once heralded as the future of crypto trading with a valuation soaring to $32 billion just a month ago, now teeters on the brink of oblivion. Bankman-Fried, affectionately known as SBF in crypto circles, steps down as CEO, with John J. Ray III—a veteran of corporate restructurings including Enron—taking the reins to navigate the company through bankruptcy proceedings.
The Meteoric Rise of FTX and Sam Bankman-Fried
To understand the scale of this implosion, one must rewind to FTX's improbable ascent. Founded in 2019 by Bankman-Fried, a former Wall Street trader at Jane Street with a background in physics from MIT, FTX quickly disrupted the crypto exchange landscape. The platform distinguished itself with innovative features like leveraged tokens, prediction markets via Polymarket integration, and high-profile naming rights deals, such as the FTX Arena in Miami.
Bankman-Fried's charisma and effective altruism advocacy propelled him to celebrity status. He hobnobbed with politicians, donated millions to causes, and positioned FTX as a compliant, user-friendly alternative to rivals like Binance and Coinbase. By July 2021, FTX raised $900 million in a funding round led by SoftBank, Temasek, and Sequoia Capital at a $18 billion valuation. Another round in October 2022 pushed it to $32 billion, with investors including Ontario Teachers' Pension Plan and Tiger Global.
Alameda Research, founded by Bankman-Fried in 2017, served as the secretive quantitative trading arm. The two entities shared more than ethos; a CoinDesk report on November 2 revealed Alameda held a massive balance sheet of FTX's native FTT token, raising red flags about solvency and potential commingling of funds.
The Spark That Ignited the Fire
The unraveling accelerates on November 2 when CoinDesk publishes its exposé. FTT, meant to back FTX's balance sheet, suddenly looks like a house of cards. Rival exchange Binance, led by CZ (Changpeng Zhao), announces on November 6 it will liquidate its FTT holdings, citing "recent revelations." This triggers a cascade: FTT's price plummets over 80% in days, from $25 to under $3.
Customer panic ensues. Withdrawal requests surge to $6 billion in 72 hours starting November 6, according to Bankman-Fried's own Twitter Spaces admission on November 8. FTX halts withdrawals for "24 hours" on November 6, then extends it, fueling fears of insolvency.
SBF scrambles for a lifeline. On November 8, Binance signs a non-binding letter of intent to acquire FTX for its international operations, injecting $1.4 billion in liquidity via FTT buyback. Hopes flare briefly as Binance's due diligence begins. But by November 9, Binance CEO CZ tweets the deal is off, citing "issues with asset liabilities." Reports emerge of missing customer funds potentially diverted to Alameda for risky bets, including losses on Solana and other tokens.
Bankruptcy Filing and Immediate Fallout
With no bailout in sight, FTX pulls the trigger on bankruptcy at 11:44 PM ET on November 11. The Delaware filing lists assets and liabilities both estimated between $10 billion and $50 billion, underscoring the opaque scale of the mess. John Ray III's appointment signals severity; his track record speaks to untangling fraudulent enterprises.
Trading on FTX halts entirely. The exchange's app crashes under withdrawal volume. SBF tweets assurances of sufficient assets to cover users, but skepticism reigns. "Asset shortfall is ~$8bn," he discloses in a November 10 message to staff, per leaked communications.
The contagion spreads. Bitcoin dips below $16,500, its lowest since December 2022 projections—wait, no, as of now, the lowest in two years. Ethereum and other alts tumble 10-20%. BlockFi, a crypto lender with ties to FTX, pauses withdrawals. Creditors line up, including retail users worldwide.
Startup Lessons from the FTX Debacle
For the startup ecosystem, FTX exemplifies the perils of hyper-growth in unregulated spaces. Valued at unicorn status within two years, it burned bright but ignored fundamentals: transparent accounting, segregated customer funds, and risk management. Venture capitalists who poured billions now face write-downs; Sequoia’s $214 million investment, detailed in a now-embarrassing blog post praising SBF, draws scrutiny.
Crypto startups, often bootstrapped on token economics, face unique risks. FTT's role mirrored a Ponzi-like structure, where exchange tokens propped up valuations without real revenue backing. Bankman-Fried's "effective accelerationism"—pouring profits into Alameda—blurred lines between exchange and hedge fund, violating basic fiduciary duties.
Regulators circle. The SEC, CFTC, and DOJ launch probes. U.S. lawmakers call for hearings. Bahamas freezes FTX's local assets. This could hasten global crypto rules, akin to post-FTX Terra/Luna collapse in May.
What Happens Next?
Bankruptcy court battles loom. Customers await recovery; priority claims may see pennies on the dollar. SBF retreats to the Bahamas, facing potential lawsuits. His political donations—over $40 million to Democrats—invite ethics questions.
For startups, the takeaway is clear: Hype alone doesn't sustain. FTX's fall, from $32 billion darling to bankrupt shell in weeks, warns of overleveraged ambition. As the dust settles, the crypto winter deepens, testing survivors' mettle.
The industry holds its breath. Will FTX's carcass yield lessons or more scandals? Only time—and forensic accountants—will tell.
(This article will be updated as events unfold.)
