Is a cryptocurrency a safe asset class ?
The third – largest crypto exchange FTX collapsed at the beginning of November 2022, after it came to light that the investment fund Alameda Research had been using FTX customer assets to cover trading losses.
In 2017, Sam Bankman – Fried co-founded Alameda Research, a cryptocurrency trading firm. In 2019, Bankman – Fried had the idea of starting a cryptocurrency exchange to help bring in revenue to fund Alameda’s activities, and founded FTX.
Bankman – Fried was the CEO of both companies until he formally stepped down from his position at Alameda in October 2021, promoting traders Caroline Ellison to co-CEOs.
Alameda Research was the largest trader on FTX, bringing liquidity to the exchange. In May and June 2022 the Alameda suffered a series of losses resulted in FTX lending the trading firm more than half of its customer funds. At the same time FTX used software to conceal the misuse of customer funds. The FTX prior to its collapse was the third – largest cryptocurrency exchange by volume.
On 11 November, 2022, FTX, FTX US, Alameda Research, and more than 100 affiliates filed for bancruptcy. Bankman – Fried resigned as CEO and was replaced by a corporate restructuring specialist, who oversaw the liquidation of Enron.
Authorities in the Bahamas, questioned Bankman – Fried on 12 November, 2022. The FTX’s balance sheet shortly before the bancruptcy showed USD 9 billion in liabilities against USD 900 million in liquid assets, USD 5 billion in less liquid assets, and USD 3,2 billion in illiquid private equity investments. Additionally, between 1 and 2 billion in clients funds could not be accounted. The net worth of assets prior to the collapse, was estimated at USD 16 billion.
The collapse of FTX has had a wide impact on cryptocurrency markets, with comparison made to the Enron and Madoff investment case. Cryptocurrencies experienced declines in value as news of FTX’s collapse. Bitcoin sank to its lowest price in two years. Share prices for publicly traded cryptocurrency companies also declined. The collapse of FTX caused skepticism of cryptocurrencies as an asset class.
Warsaw Economic Institute
Nowy Świat Street 49, room 306
tel. (+48) 512 645 536