How did FTX collapse?

The collapse of FTX, a once-prominent cryptocurrency exchange, can be seen as a modern-day Icarus tale. It soared high on the wings of innovation and ambitious expansion but fell dramatically when those wings melted under the heat of scrutiny and financial mismanagement.

FTX, led by Sam Bankman-Fried, was the epitome of a meteoric rise in the crypto industry, gaining the trust of sophisticated investors and everyday users alike. However, the downfall began when a series of articles and reports started questioning the financial health of FTX and its sister trading firm, Alameda Research. The crux was the alleged co-mingling of customer funds and the use of FTX’s native token, FTT, as collateral in a way that was not sustainable or transparent.

The situation spiraled when a rival exchange’s CEO, Changpeng Zhao of Binance, announced the liquidation of his FTT holdings, citing concerns about FTX’s liquidity. This triggered a classic bank run; customers rushed to withdraw their funds, only to discover that FTX did not have the liquidity to honor all withdrawals. Amidst this liquidity crisis, a proposed acquisition by Binance fell through after a due diligence review, leaving FTX exposed to the full brunt of its operational and financial vulnerabilities.

This sequence of events led to a loss of trust, which is the bedrock of any financial institution, especially in the blockchain world where transparency and reliability are paramount. The fallout was swift and severe, affecting not only FTX’s customers but also casting a long shadow over the crypto industry as a whole, questioning its stability and the adequacy of its regulatory frameworks.

Issue with most banks — they cannot honor all the withdrawals either?