🐻 A breakdown of the darkest 48 hrs in crypto

The past 48 hours have been one of the most stressful events in crypto history. What went down between FTX, Alameda Research and Binance will go down as one of the grimmest moments in crypto by far.

tl;dr FTX, the third-largest crypto exchange experiences a liquidity crunch after a report reveals their misuse of customer funds. This causes a widespread exodus of crypto investors crashing the market and FTX depositors losing their assets.

It’s hard to capture the full magnitude of what transpired, but in this issue, we will try to give a complete breakdown of what happened and what you could expect next. Here’s the full story split into three sagas:

• Part 1: The FTX and Alameda scandal

• Part 2: Binance enters the chat

• Part 3: How will the industry recover?

Part 1: The FTX and Alameda scandal

The story begins with a man named Sam Bankman-fried (SBF), founder of both FTX (exchange) and Alameda Research (trading firm). Over the year, SBF successfully created an image of himself as a crypto saint.

Referred to as the "JP Morgan of the crypto industry", SBF gained plenty of attention when he seemingly came to the rescue to bail out bankrupt crypto lending companies like Blockfi and Voyager.

It's now been revealed that SBF wasn't quite honest about the deals and how much real money was actually on the table. In fact, he secretly funnelled FTX customer deposits to bail out Alameda who was affected by the 3AC and Voyager collapse. No one knew, not even all the FTX execs apparently.

This all came back to haunt them last week when Coindesk dropped a report revealing the close ties between FTX and Alameda Research. The report showed that more than half of Alameda's balance sheet was held in $FTT (native FTX token).

FTX would print $FTT (native FTX token) out of thin air -> Alameda purchases large bags of it -> $FTT pumps -> Alameda uses $FTT as collateral on FTX and borrows real users’ assets.

This thread gives a detailed breakdown of the scandalous ties 👇.

And then the snowball of events happened:

On Nov 6 at 9:30 AM: Caroline, CEO of Alameda Research tweets and basically confirms the report to be true. At 10:47 AM: CZ of Binance (competing exchange) drops a major bomb that he would be dumping their position of $FTT given the “recent revelations”. At 1:49 PM: CZ confirms that they have started to exit their $FTT position.On Nov 7 at 12:38 PM: SBF reassures customers that they are not insolvent and can continue to process withdrawals. The tweet is now deleted.

Part 2: Binance enters the chat

At this point, the feud was on between SBF and CZ. Everyone thought it was fun and games between the two rival centralized exchanges. Plenty of people were also in denial that FTX was insolvent, but it was too late, customer sentiment had fallen. Depositors were flocking to withdraw their assets from FTX, resulting in a liquidity crunch.

By Nov 8 morning: FTX had stopped processing withdrawals. At 11:09 AM: Binance came out with a statement about a possible acquisition of FTX upon review of their finances. This put the speculation to rest and confirmed that FTX was indeed in trouble, despite SBF’s earlier tweets denying any issues.

So within 24 hours, FTX and Binance went from enemies to frenemies. A bold, alpha move by CZ to come up from under the rug and sweep up their competitor. Some even speculated that CZ may have orchestrated this downfall, but we're inclined to believe so.

In the next 24 hours, reality began to sink in for people as everyone anxiously waited for confirmation about the acquisition. But reports were flooding in that the deal would likely not go through.

On Nov 9 at 4:00 PM: Binance confirms that they have walked away from the deal, stating that FTX's issues are "beyond our control or ability to help".

With just a day of reviewing FTX's finances, Binance could already see that the deal wouldn't be possible. So how bad is it really? How much customer assets are actually missing?

Part 3: Will the industry recover?

This is the big question on everyone’s mind. How can the industry recover from this huge loss of customer funds, drop in market value and overall trust? Is it even possible to recover from this?

At the time of writing this:

• FTX/Alameda is apparently shorting $USDT as a last attempt.

• A slack message from SBF to FTX employees has been leaked, revealing that they will continue to attempt to raise money.

• There is speculation that FTX and TRX (Tron) could be working together to "fix" the issue.

It's been a particularly tough year for crypto with a number of events that have set us back.

As the story continues to develop, there are a few things we can tell you about the likely future of crypto:

• Stricter regulation across the crypto industry

• More transparency among exchanges to publish their proof of reserves

• Lots of time to rebuild consumer trust again

For anyone building or involved in the crypto industry, this is a tough and disappointing pill to swallow. It's been hard to tell who is actually working for the good of the industry and who is against us. To say someone is evil is a strong statement, rather, what we could have just seen is the deep end of toxic altruism - someone who had too much power and thought he could bear the risk to do what he thought was good for the world.

One thing is true: for the industry to progress, we need to do a clean sweep.

However exposed you are, we hope that you take some time away to go out for a walk, spend time with your loved ones and remind yourself of the truly important things in life.

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