The cryptocurrency market experienced one of its most significant disruptions in late 2022 when FTX, the third-largest cryptocurrency exchange by volume, spectacularly collapsed. Founded in 2019 by Sam Bankman-Fried and Gary Wang, FTX had rapidly grown to serve over one million users and reached a valuation of $32 billion before its downfall. This crash sent shockwaves throughout the cryptocurrency ecosystem, causing widespread losses and undermining confidence in the entire market. The FTX collapse has been compared to the Enron scandal and the Madoff investment scandal due to its scale and the fraud involved, with federal prosecutors describing it as “one of the biggest financial frauds in American history.”
Economic Situation & Policies Before the Crash
The period leading up to the FTX collapse was characterized by extraordinary growth in the cryptocurrency sector. In 2021, FTX established itself as the fastest-growing cryptocurrency exchange globally, with its spot trading volumes reaching an impressive $719 billion, representing a 2,400% increase compared to 2020 figures. The exchange facilitated trading of Bitcoin, Ethereum, Ripple, Tether, and over 300 trading pairs, while also offering its own token, FTT. The company’s user registrations soared by 1,500% during this period, bringing its total active users to over five million.
The broader cryptocurrency market was experiencing unprecedented prosperity during this time. November 2021 marked the peak of the market, with Bitcoin reaching an all-time high above $68,000 and the total cryptocurrency market capitalization approaching $3 trillion. Many alternative cryptocurrencies significantly outperformed Bitcoin, with Solana growing 11,000% and Terra increasing by 12,000% through 2021. This explosive growth attracted substantial institutional investment, with FTX raising more than $1.4 billion from notable investors such as Sequoia, Paradigm, SoftBank, and Tiger Global.
The company projected an image of stability and responsibility in the loosely regulated cryptocurrency world. This perception, combined with aggressive fundraising and advertising campaigns, helped FTX secure high-profile partnerships and endorsements from celebrities like Tom Brady, Gisele Bündchen, and Naomi Osaka. The Miami Heat’s arena was even renamed to FTX Arena as part of a $135 million, 19-year deal signed in 2021. By January 2022, FTX and its US affiliate were valued at $32 billion and $8 billion respectively, cementing Bankman-Fried’s status as a wunderkind of the crypto world.
How It Crashed
The beginning of the end for FTX can be traced to November 2, 2022, when cryptocurrency news site CoinDesk published an article revealing that Alameda Research, a trading firm also owned by Bankman-Fried, held a significant portion of its assets in FTT, FTX’s native token. This raised serious questions about the relationship between the two entities and FTX’s financial stability, as Alameda’s balance sheet was heavily dependent on a token created by its sister company rather than independent assets or fiat currency.
The situation rapidly deteriorated when Binance CEO Changpeng Zhao announced on November 6 that his company would sell all its FTT holdings, citing “recent revelations that came to light” as the motivation. This announcement triggered a crisis of confidence among FTX customers, resulting in approximately $6 billion in withdrawal requests over just three days, similar to a classic bank run. FTX quickly found itself unable to meet these demands, revealing a fundamental liquidity crisis.
In a dramatic turn of events, Binance initially announced on November 8 that it had entered into a non-binding agreement to acquire FTX to address the liquidity crisis. However, after conducting due diligence, Binance withdrew from the deal the next day, citing concerns about FTX’s financial practices and possible mishandling of customer funds. Without this lifeline, FTX’s collapse accelerated. On November 11, 2022, FTX, Alameda Research, and over 100 affiliated entities filed for Chapter 11 bankruptcy protection. Bankman-Fried resigned as CEO and was replaced by restructuring expert John J. Ray III.
Subsequent investigations revealed that FTX had been funneling customer deposits to Alameda Research without disclosure to customers. This co-mingling of funds between entities constituted a severe breach of customer trust and violated basic financial management principles. The collapse exposed an $8 billion hole in FTX’s accounts, with allegations that the funds had been used for risky investments, luxury real estate purchases, and covering Alameda’s debts.
Range of the Crash
The impact of FTX’s collapse extended far beyond the company itself, triggering a significant downturn across the entire cryptocurrency market. The industry’s total market capitalization plummeted from approximately $3 trillion at its peak to around $900 billion following the crash. Bitcoin, the market’s flagship cryptocurrency, fell to its lowest price in two years, and many cryptocurrencies lost substantial value in the aftermath.
The contagion spread to other cryptocurrency firms with connections to FTX. BlockFi, a cryptocurrency lender with “significant exposure” to FTX, halted withdrawals and prepared to file for bankruptcy by mid-November 2022. Genesis, another cryptocurrency lender, also suspended withdrawals, causing Gemini exchange to stop redemptions for clients using Genesis services. Crypto.com experienced a significant outflow of funds as fears of similar collapses spread throughout the market, with its exchange token Cronos losing approximately $1 billion in value.
Institutional investors in FTX suffered massive losses. Sequoia Capital marked down the value of its FTX stake to zero, while other backers including SoftBank, Tiger Global, and Singapore’s Temasek faced similar writedowns. The contagion effects extended to the broader financial ecosystem, with concerns raised about Silvergate Bank, which had served as a depositor for FTX.
The human impact was equally severe, with countless retail investors unable to access their funds. The bankruptcy filing revealed that FTX owed over $3 billion to its top 50 creditors alone, with total liabilities estimated between $10 billion and $50 billion. Many individuals who had trusted FTX as a secure platform for their cryptocurrency investments suddenly found themselves in financial jeopardy, with no immediate recourse for recovering their assets.
What Emerged After
In the months following the FTX collapse, the cryptocurrency market began a gradual recovery process. By January 17, 2023, Bitcoin had reclaimed all the losses it had suffered since FTX’s downfall, stabilizing above $21,000. This resilience demonstrated that while the FTX collapse was a significant blow to the industry, it was not fatal to the broader cryptocurrency ecosystem.
The legal consequences for the key figures involved were substantial. In December 2022, the U.S. government brought civil and criminal charges against Bankman-Fried and other top executives for misappropriating customer deposits. Several executives, including Caroline Ellison, Gary Wang, and Nishad Singh, pleaded guilty to fraud charges and testified against Bankman-Fried. In November 2023, Bankman-Fried was convicted on multiple counts of fraud and in 2024 was sentenced to 25 years in prison for stealing $8 billion from customers.
The crash prompted increased calls for regulatory oversight of the cryptocurrency industry. Regulators worldwide began scrutinizing crypto exchanges more closely, demanding greater transparency and compliance with financial regulations. The industry itself started implementing more robust risk management practices and emphasizing the importance of proper corporate governance and internal controls.
For affected FTX customers, the bankruptcy proceedings offered a potential, albeit uncertain, path to recovering some of their funds. The recovery process depends on various factors including court rulings, the liquidation of FTX assets, and the complex legal priority of different classes of creditors. John J. Ray III, the new CEO overseeing the bankruptcy, has worked to trace and recover assets, though the process is expected to be lengthy and complicated.
The FTX debacle also led to a reevaluation of business practices within the cryptocurrency industry. Companies began placing greater emphasis on proof of reserves, third-party audits, and transparent financial reporting. The importance of segregating customer funds from operational capital became a central tenet for exchanges seeking to rebuild trust with users and investors.
The FTX Collapse
The FTX collapse represents a watershed moment in the history of cryptocurrency, exposing significant vulnerabilities in an industry that had experienced explosive growth without corresponding improvements in oversight and risk management. What began as a promising venture led by a charismatic founder ultimately revealed itself as one of the largest financial frauds in recent history, with billions of dollars in customer funds misappropriated.
The crash served as a harsh reminder that despite the innovative nature of blockchain technology, fundamental principles of financial management and corporate governance remain essential. The fallout accelerated regulatory attention to the cryptocurrency sector and forced companies to implement stronger protections for customer assets. While the market has shown resilience in its recovery, the scars of the FTX collapse continue to influence how cryptocurrency businesses operate and how investors approach this asset class.
Perhaps most importantly, the FTX saga demonstrated that the cryptocurrency market, despite its revolutionary technology and decentralization ethos, is not immune to the types of fraud and mismanagement that have plagued traditional financial markets throughout history. As the industry continues to mature, the lessons learned from FTX’s downfall may ultimately contribute to a more stable, transparent, and trustworthy cryptocurrency ecosystem.
Michael Crag
