Five questions about the fall of FTX answered
On November 5, Bitcoin, the best-known and most valuable cryptocurrency, was worth just over $21,300. By the 9th of November, it was clear that things could have gone better on FTX because the price of bitcoin had dropped by more than 25% since the 5th. You should check out this platform (bitcoin-prime.app/) if you’re interested in trading or investing in cryptocurrencies.
Since then, the bitcoin price has mostly been between $16,000 and $10,000. This means that the price had dropped by more than 75% since its all-time high in November 2021, when it was over $69,000. The recent drop may have been caused by the failure of FTX, which led to the drop.
- What went wrong with the FTX market?
As time goes on and journalists dig into the story, more and more details will come to light. On the other hand, there is a very simple reason why FTX failed at a fundamental level. It was a trading platform with plans to turn into a hedge fund in the future.
- Why did FTX stop operating?
At the time, Sam Bankman-Fried, who was 30 years old, ran FTX. He also owned and ran a trading company called Alameda Research. This company was set up in the same way that many hedge funds on Wall Street are. The business did well financially because of arbitrage.
People in one part of the world bought Bitcoin and other crypto tokens and then sold them in another. The difference between the two prices is how much money he made. Arbitrage is a way for hedge funds to get as much money as possible from their investments. They often borrow money and make big bets to do this. Almeida worked on similar lines. Most of the time, it was a hedge fund for digital currencies.
- Why are these things going wrong now?
The price of bitcoin and other digital currencies has gone through the roof in the past few years. People rarely talk about essential things in a world where money constantly moves around. In November of last year, prices for cryptocurrencies hit an all-time high, and they had already gone down a lot before the latest meltdown.
Frauds like this one have been caught in the past. The biggest Ponzi scheme ever was run by Bernie Madoff. But no one knew about it before the crash of 2008. When the dot-com bubble burst in 2000, Enron and WorldCom were troubled. Because of this, it is almost sure that new significant pros and cons of cryptocurrency will become apparent in the coming days and weeks.
- What about the trust that digital currencies like bitcoin were supposed to build?
People think that Satoshi Nakamoto made bitcoin. No one knows what he, she, or they are called. We know why Nakamoto created bitcoin, though. In February 2009, Nakamoto wrote on a message board, “The main problem with traditional money is that it needs so much trust to work.”
Nakamoto offered a solution to the problem. He came up with the name “Bitcoin” for the new kind of currency he was proposing. His plan says there will never be more than 21 million bitcoins, and the last one will be mined in the year 2140. As Nakamoto had suggested, the problem was that people needed to wait longer before switching away from the money used at the time.
But by the second half of 2021, most of the wealthy world had gotten used to high inflation. This kept happening until about the middle of 2022. It was like looking for a needle in a haystack while waiting for the cryptocurrency boom. People who started investing in cryptocurrencies later than others lost a lot of money when the bubble burst.
- On the other hand, didn’t a lot of money bet on FTX by people who knew what they were doing?
A large number of big investors put their money on FTX. It also got money from Sequoia Capital, a hedge fund, and Temasek, an investment company run by the government of Singapore. Several news stories say that Sequoia Capital seems to have taken out all of its more than $210 million investment in FTX. Temasek didn’t pay the $275 million it said it would.
It has been clear for a long time that people in the financial industry like to go with the flow. No one wants to be someone who shows up late to a party and ruins everyone’s fun. Zweig says, “Sam Bankman-Fried may have been at the center of what went wrong, but he didn’t do it all alone.” On all sides, there are a lot of lies and fakes around him. “The investment business” is what people call this field.
