The world of cryptocurrency surged into the mainstream conversation and internet activity during the pandemic, with so many folks sitting at home with time on their hands and wanting to explore alternative ways to make money. We saw surges in self-directed stock trading, and in cryptocurrency interest. Not everyone dove in with both feet, but it was definitely a trend that many were asking financial professionals like myself about, and heading to youtube and other digital platforms to learn more.
This interest took something that was extremely complex and risky and made it seem easy to get into and have success with. As with every investment, it was great when the results were favourable. Investors weren’t positioned to see the losses that came swift and plentiful.
Last 5 Years of Crypto
Before we dive into the specific case of cryptocurrency exchange FTX, founded and operated by American Sam Bankman-Fried, let’s take a glance at the world of crypto in the last 5 years.
2018: January started with the great Bitcoin crash, where after a 2017 surge in value it lost about 65% in just over a month. This led the way for most other cryptocurrencies to follow. Also in January 2018, Japan’s largest cryo exchange is hacked, with losses estimating USD$530 million, the largest theft-related loss in cryptocurrency at that time. By November of 2018, the price of Bitcoin is $5,500.
2020: At the onset of the pandemic, cryptocurrency had been performing as most other securities might, and had regained some of its value to about $8,900 on March 8. With the reality of a global pandemic, however, Bitcoin quickly lost 30% of its trading value from March 8 to March 12. This was short-lived, as the fall of 2020 saw a continued rise in Bitcoin reaching new all-time highs, reaching a $40,000 value on January 8, 2021. Cryptocurrency exchanges like Coinbase were going public on the NASDAQ stock exchange, crypto mining farms were being built to sustain the volume of transactions, and people were cashing out their profits.
2022: The sky starts to fall. Similar to the stock market volatility, cryptocurrency values also started to fall, and people started wanting to withdraw their funds. This became more challenging as we saw overleveraged crypto exchanges forced to halt withdrawals, layoff employees, and for some, bankruptcy. Four crypto exchanges file for bankruptcy before FTX follows suit in November. Citing their exposure to FTX as the reason, two more declare bankruptcy in the following months.
Now that we’re all caught up, here are some basics about a cryptocurrency exchange. Similar to a stock exchange, they provide the platform for you to invest in crypto. They take your dollars and add the cryptocurrency you’ve purchased to your digital wallet (aka account) in exchange. They hold onto the crypto in your account with them until you choose to sell and take your cash back. The problem lies with a rapid downfall of crypto value causing a panic where regular investors now want to cash out — when the exchange doesn’t have the available funds to facilitate those requests. Just as you’ve lost, they have as well.
Seems pretty basic, right?
Except when it’s not. Investigations in the operations of FTX have concluded with 13 criminal charges being laid against CEO and Founder Sam Bankman-Fried. One article used the word “calamity” to describe FTX and there’s no better word for it. The whole operation included the FTX exchange, its associated cryptocurrency FTT, along with a hedge fund and other companies that seem to have little to no purpose other than to transfer money around. All of these multi-billion dollar corporations were unsophisticated and amateur, being run from a condo in the Bahamas. There was very little real infrastructure and planning, with documents showing many of the customer’s money received and the trades not even completed
Criminal charges have been laid and there is a review of the FTX exchange and other businesses to determine the financial impact to customers including where losses can be returned. Stay tuned as we follow this case.