‘Quick as lightning’: Liquidity crunch hits Sam Bankman-Fried’s crypto empire

Billionaire Sam Bankman-Fried’s sudden fall from crypto ‘savior’ to bailout recipient dealt a severe blow to fragile confidence in the $1tn digital asset market, leaving traders and investors shocked at the speed the near collapse of one of its pillars.

FTX and Alameda Research, the crypto exchange and trading company of Bankman-Fried, were a week ago considered one of the most trusted stars in the crypto market. Bankman-Fried had bolstered its reputation by supporting struggling peers such as lender BlockFi during the height of the summer crypto crisis. This earned him the nickname “crypto Pierpont Morgan” – a reference to the banker who stepped in to stop a bank run in 1907.

But on Tuesday, the 30-year-old, whose FTX exchange was valued at $32 billion at the start of the year, was forced to look to a rival for a bailout as fears for Alameda’s financial health led to an unsustainable rush of customers demanding the return of their deposits to the market.

The liquidity crunch marked a dramatic reversal of fortune for Bankman-Fried, who in less than four years had gone from a relatively unknown high-frequency trader to become one of the best-known faces in the crypto industry. and his de facto chief spokesman in Washington. . His paper fortune reached around $24 billion just six months ago.

Bankman-Fried, the son of professors at Stanford Law School, founded FTX in 2019 and built the company’s profile by dumping millions on a high profile media campaign, which included buying the naming rights to the NBA’s Miami Heat arena – now FTX Arena – and appearing in glossy Vogue magazine ads with model Gisele Bündchen. He also got backing from major investors, including SoftBank, Tiger Global, BlackRock and the Ontario Teachers’ Pension Plan, who poured money into FTX.

A humble Bankman-Fried called on rival crypto exchange Binance on Tuesday, which within hours signed a deal to buy the exchange and guarantee client funds. He held a “very simple” town hall meeting on Tuesday, a person familiar with the matter said.

“It all happened really fast,” the person said. “He said: this is what is happening and it is done.”

News of the deal came as a shock even to veteran crypto traders and executives. Bankman-Fried said customers would receive all their money, but it would take “a little” time.

“It’s a historic moment . . . kind of like a ‘shitty shit’ moment,” said Pascal Gauthier, managing director of digital wallet provider Ledger. “It shows that no one is too big to fail. FTX seemed untouchable.

On Sunday, Binance CEO Changpeng Zhao heightened fears surrounding FTX when he said his crypto exchange had decided to sell its stash of FTT – a crypto token issued by FTX – due to “recent revelations that have been revealed”. The tweet followed a report from CoinDesk that Alameda held billions of FTT tokens on its balance sheet, inflating its assets against $8 billion in liabilities.

Changpeng Zhao at a conference

Changpeng Zhao’s Binance has reached a deal to bail out its main rival FTX © Reuters

A senior executive at a crypto trading firm said, “It’s almost like a company using its equity as collateral for a loan. And you would never do that because it’s so tied to your health as a business. When you need the warranty the most to do its job, it starts to become worthless.

On Tuesday evening London time, the value of the exchange’s FTT token fell from around $22 to around $5 in 24 hours, a collapse of more than 70%.

Binance’s proposed bailout of FTX also calls into question bailout deals Bankman-Fried negotiated with crypto industry companies hit by the token price crash this year, which wiped out two-thirds of the total market capitalization of digital assets.

R3 Managing Director Charley Cooper said, “Until yesterday, FTX was still revered as a savior to many parts of the ecosystem following the terra/luna crash, but on Tuesday afternoon, they were gobbled up by one of their early investors. ”

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