FTX files for bankruptcy

FTX Files For Bankruptcy: How Safe Is Your Money On Centralized Exchanges

In Industry, News by Prajjval TripathiLeave a Comment

FTX, the third-largest cryptocurrency exchange by transaction volume, has filed for bankruptcy, leaving hundreds of thousands of users in tatters. The impact of the news is already visible in the crypto market, with Bitcoin slumping to $16,500 minutes after the news. While CEO & Founder Sam Bankman-Fried has resigned, his deeds put a huge question mark on all the centralized exchanges. When the CEO of such a huge exchange plays a gamble with billions of dollars of investors’ money, you must ask yourself- how safe is your money on centralized exchanges? 

$BTC falls to $16,500
Source: Tradingview

Understanding The FTX Fiasco

The issue caught mainstream attention after Binance CEO Changpeng Zhao took to Twitter to announce that the exchange would withdraw its holdings worth billions of dollars in FTX’s native token, $FTT. This was after a CoinDesk report on the balance sheet of Alameda Research, a crypto trading firm previously run by Sam Bankman-Fried. The shocking report revealed how the Alameda Research balance sheet was full of $FTT, and thus began the downfall of the crypto exchange valuing $32 billion. “It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token,” said Cory Klippsten, CEO of investment platform Swan Bitcoin.

Binance to liquidate FTX holdings
Source: Twitter

To understand the magnitude of the irregularity- the total value of the 197 $FTT tokens in circulation was $5.1 billion at the time of the report’s release. Almeda Research’s asset holdings during the report’s release amounted to $14.6 billion, and much of it was $FTT. What’s the problem? Well, both FTX and Almeda Research were owned by Bankman when these irregularities took place. Every time Almeda sells some $FTT, its price will be heavily impacted. Almeda CEO Caroline Ellison’s refusal to comment on the issue further puts the role of the decision-makers under the radar. 

Binance-FTX deal fails
Source: Twitter

Decision makers at FTX approached Binance after the reports of irregularities spread like wildfire. Unfortunately, Binance pulled out hours after announcing that they were discussing some sort of bail-out deal with the FTX administration. 

Impact Of FTX Fiasco On Crypto Market

A bloodbath in the altcoin market is one of the many severe outcomes of the FTX fiasco. More than $150 billion has been wiped out from the crypto market, and the number continues to rise. Over 109,000 traders have been liquidated in the past 24 hours, with the net liquidation amount surpassing $200 million. Stablecoins like USDD have lost their peg to the US dollar, and the road ahead remains gloomy. 

Liquidation in crypto after FTX fiasco
Source: https://www.coinglass.com/LiquidationData

On the brighter side, the FTX fiasco has forced other big players, including Binance, to take significant moves to bring in more transparency and restore the trust of investors. But the issue has triggered a debate over the role of centralized exchanges in the crypto market.

What Is The Solution

We have written consistently about the drawbacks of centralized exchanges and custodial wallets. When a certain number of people control your assets and enjoy the power to manipulate the price of cryptocurrencies you invest in, the very basic idea of crypto goes for a toss. Centralized frameworks jeopardize the mass adoption of cryptocurrencies, and it is becoming apparent now.  

Decentralized exchanges answer every problem that arises due to irregularities related to centralized exchanges. Decentralized exchanges like PancakeSwap and SushiSwap are more secure, centralized, and indifferent to manipulation. While they are a little complex to use, the benefits dwarf all the minor cons. Also, Non-custodial wallets like Trust Wallet and MetaMask emerge as safer alternatives to centralized exchanges. They allow investors to store and manage their cryptocurrencies without any KYC, and an investor is in complete control of their funds. In a nutshell, non-custodial wallets represent the basic idea of cryptocurrencies. With issues like the FTX fiasco becoming more frequent, using such wallets is a necessity.

Leave a Comment