Each participant has the incentive to be first in line to take their money before the money runs out whenever questions about their soundness start to surface.
FTX was formerly one of the biggest cryptocurrency trading platforms in the world.
The Bahamas-based cryptocurrency exchange, which was founded in 2019, rose quickly to fame and was valued at more than USD 30 billion earlier this year.
In the last two weeks, everything has changed. First, there were worries raised about connections between FTX and the asset-trading company Alameda Research, including claims that client funds had been moved from FTX to Alameda.
A few days later, the largest cryptocurrency exchange and competing company Binance stated they will liquidate their holdings of FTT tokens, which are said to make up the majority of Alameda’s assets.
Customers who were in a panic raced to withdraw money from FTX, and now the business is in danger of failing. A banner notice on its website states that it is “temporarily unable to process withdrawals.”
In the loosely regulated world of cryptocurrencies, this is not the first such rapid disintegration we have witnessed, and it’s not likely to be the last either.
Sam Bankman-Fried, the primary owner of both FTX and Alameda, earlier this year managed to save other struggling crypto businesses. He is currently in dire need of an investor with $8 billion to salvage his businesses.
Numerous companies have already written down the value of their FTX shares. Finding investors prepared to provide additional financing will thus not be simple for Bankman-Fried.
Binance considered outright acquiring the struggling business. It made this decision in light of the US Securities and Exchange Commission’s investigation and worries over misconduct claims.
Currently, FTT is cheaper. It was trading at USD 24 a week ago. It is now less than USD 4.
Trading on poorly regulated exchanges with “assets” that have no underlying intrinsic value is always going to be an extremely dangerous endeavor. It’s going to end in tears for a lot of people.
There are also more types of assets. Company shares have an intrinsic worth based on the dividend (or at least an anticipated future payout) paid from the firm’s profits.
The essential worth of the real estate is determined by the rent an investor receives (or the owner-occupier saves).
A bond’s value is influenced by the interest rate it offers. Even gold is useful in jewelry, dental fillings, and electronics.
The so-called “cryptocurrencies” Dogecoin, Ether, and thousands of other “alt-coins” and “meme-coins” do not, however, have such a fundamental value.
Speculators try to sell them to someone else before the price plummets in this game of pass-the-parcel.
The equivalent of a “bank run” in the form of the Great Depression is possible with unregulated financial institutions.
Each participant has the incentive to be first in line to take their money before the money runs out whenever questions about their soundness start to surface.
In a recent interview, Bankman-Fried described his business strategy, which appears to place more emphasis on capital from fresh investors than on potential profits based on the inherent worth of the assets.
