The FTX Collapse (2022): The Greatest Crypto Scandal in History
How Sam Bankman-Fried built the world's second-largest crypto exchange and collapsed it in 72 hours, taking down $32 billion in market cap and the savings of 1 million customers
In November 2022, FTX, the world's second-largest cryptocurrency exchange, collapsed in less than 72 hours after a news report revealed the misuse of customer funds. Sam Bankman-Fried, once hailed as the 'J.P. Morgan of crypto,' was arrested and sentenced to 25 years in prison.
FTX: Meteoric Rise
FTX was founded in 2019 by Sam Bankman-Fried (SBF), a former quantitative trader at Jane Street Capital. In less than three years, it became the world's second-largest crypto exchange by trading volume.
Growth:
- 2019: Founded with $100 million in monthly volume
- 2021: $10 billion in daily volume
- 2022 (peak): Valued at $32 billion in a $400 million funding round
- Investors: Sequoia Capital, SoftBank, BlackRock, Ontario Teachers' Pension Plan
SBF became the public face of the crypto industry: testifying before the US Congress, funding political campaigns (the second-largest Democratic donor after George Soros in 2022), and promoting FTX with Super Bowl commercials featuring Larry David.
His public philosophy was Effective Altruism: earn as much as possible to give as much as possible. He was celebrated as an altruistic visionary.
The Anatomy of Deceit
Behind the brilliant facade lay a systematic fraud:
FTX and Alameda Research: SBF also controlled Alameda Research, a crypto hedge fund. FTX and Alameda were legally separate, but in reality, they were completely intertwined.
The use of customer funds: FTX loaned its customers' deposits to Alameda Research to fund the hedge fund's speculative bets. This was:
- Illegal (customer deposits are not corporate assets)
- Hidden from customers, investors, and regulators
Alameda used these funds to:
- Speculate in crypto with leverage
- Buy real estate in the Bahamas
- Invest in other companies
- Finance SBF's political donations
At the time of the collapse, it was discovered that FTX had an $8 billion hole in customer accounts.
The Trigger: The CoinDesk Report (November 2, 2022)
On November 2, 2022, CoinDesk published a leaked document showing that the Alameda Research balance sheet was composed primarily of FTT — the token issued by FTX itself.
In essence, the entire system was propped up by an asset that FTX controlled: if the price of FTT were to crash, the entire house of cards would fall.
The 72 Hours of the Collapse (November 6-11, 2022)
November 6: CZ (Changpeng Zhao) of Binance, FTX's main competitor, announced on Twitter that Binance would sell all its FTT holdings (approximately $500 million). This was the red flag.
November 7-8: Customers began withdrawing en masse. FTX received withdrawal requests totaling $6 billion in 72 hours.
November 8: FTX announced an acquisition deal with Binance. FTX stock trading was suspended.
November 9: Binance, after a quick due diligence, withdrew from the deal: 'the problems are too big.' FTX suspended all withdrawals.
November 11: FTX, Alameda, and 130 affiliated companies filed for bankruptcy. SBF resigned. The new crisis CEO (the same one who managed the Enron bankruptcy) declared: 'I have never seen such a complete failure of corporate controls.'
December 12: SBF was arrested in the Bahamas on an American warrant.
The Consequences
For the crypto sector:
- The price of Bitcoin fell by 25% in one week
- Contagion affected BlockFi, Genesis, and Voyager (all went bankrupt or faced difficulties)
- The total market cap of the crypto sector dropped from $1 trillion to $850 billion
For customers:
- 1 million customers with frozen funds
- Estimated losses: $1 to $8 billion for depositors
For regulation:
- Greatly accelerated the crypto regulation process in the US and Europe
- The European MiCA (Markets in Crypto Assets) regulation was approved partly in response to FTX
For SBF:
- Sentenced in November 2023 to 25 years in prison for fraud, conspiracy, and money laundering
Eternal Lessons
- 'Not your keys, not your coins': crypto deposited on exchanges is not yours — you are an unsecured creditor
- Rapid growth is a warning sign: FTX became a $32 billion company in 3 years without adequate controls
- Conflicts of interest must be scrutinized: an exchange and a hedge fund under the same owner were a ticking time bomb
- Popularity is no guarantee of honesty: investors like Sequoia and SoftBank failed to conduct adequate due diligence
- 'This time is different' always leads to the same place: even in a 'revolutionary' sector, the fundamental laws of finance still apply