In-Depth Review of the FTX Incident: From Cryptocurrency Market Myth to Warning of Collapse

How a $32 Billion Empire Collapsed in One Week

In November 2022, the collapse of cryptocurrency exchange FTX shocked the entire industry. This once-glorious platform plummeted from a valuation of $32 billion in just three days, with founder Bankman-Fried’s net worth shrinking from $24 billion to less than $1 billion. The sudden crisis began with a simple announcement on Twitter, but the chain reaction it triggered far exceeded all expectations.

Sources familiar with the matter revealed that vulnerabilities on FTX’s balance sheet could amount to as much as $8 billion—enough to send shockwaves through the entire crypto ecosystem. Within days of the crisis breaking out, Bitcoin(BTC) fell over 20%, Ethereum(ETH) also declined more than 20%, and FTX Token(FTT) dropped from its high to $0.50, causing heavy losses for investors.

Who Ignited the Bomb

The trigger was a leaked balance sheet. The document exposed a fatal weakness in Alameda, FTX’s joint fund: over 90% of its assets were composed of FTT tokens. FTT is a token created by FTX to facilitate platform trading, essentially an “internal coin” that depends on the platform’s healthy operation.

Worse still, Bankman-Fried had already used大量FTT to buy back FTX equity. This highly leveraged setup meant that once FTT’s price fell, the entire empire could collapse like a house of cards.

A competitor announced on social media that they would sell their FTT holdings and compared it to the Luna token collapse in May this year. This statement instantly ignited market sentiment—customers began frantic withdrawals. Within 36 hours, FTX faced approximately $6 billion in bank runs, a figure sufficient to topple any unprepared exchange.

Bankman-Fried defended on Twitter, claiming “competitors are using false rumors to drive us out,” but subsequent emergency funding calls revealed the situation was far more serious than anticipated.

The Embarrassment of Venture Capital: Deceived Investment Firms

It wasn’t just retail investors who were dazzled by FTX’s glamorous image. Sequoia Capital had invested $213 million supporting the exchange, but shortly after the crisis erupted, this well-known firm told its investors in a letter that the investment was now worthless.

What does this decision itself indicate? It suggests that investment firms’ understanding of FTX’s true operational state was likely far less than they admitted. Bankman-Fried built a “trust halo” through Super Bowl ads, stadium naming rights, and political donations, causing investors to overlook warning signs.

FTX’s Business Model Essentially Is Gambling

A deep dive into FTX’s operational structure reveals why the collapse came so swiftly.

The core business of this exchange was built on high-risk derivatives trading—allowing investors to make large bets on the future value of cryptocurrencies using borrowed funds. This model is actually illegal in the U.S., but Bankman-Fried’s U.S. subsidiaries claimed to offer “more conservative” services while lobbying regulators continuously.

As the company grew, Bankman-Fried became a major political donor to the Biden administration (contributing over $5 million), which gave FTX a degree of political friendliness. But the inherent risks of the business model did not diminish.

When market sentiment reversed, the entire “high leverage—high return” game instantly revealed its fangs. Labels like “bank run” were no longer hypothetical but actual events.

The Ultimate Proof of the Crypto Industry’s Fragility

Cornell University economist Eswar Prasad’s assessment hits the mark: “This fully demonstrates the fragility of the entire cryptocurrency system. Even large, seemingly stable institutions have vulnerable foundations, at least implicitly carrying the risk of collapse.”

The precise implications of FTX’s bankruptcy:

1. The Cost of Regulatory Vacuum — FTX operated in an environment of free development and lax regulation, leading to the accumulation of extreme risks without oversight.

2. The Illusory Nature of Trust — No matter how large the marketing budget and political donations, they cannot compensate for fundamental flaws in the business model.

3. The Spread of Systemic Risk — The collapse of one platform can instantly freeze liquidity across the entire ecosystem, causing chain reactions.

Looking back, Bankman-Fried’s previous “rescues” of struggling crypto projects (lending $485 million to Voyager Digital, providing $400 million credit to BlockFi) were essentially using Alameda’s leverage to gamble on a massive scale. Once counterparties collapse, these “rescues” can instantly evaporate.

The Final Desperation: From the Altar to Bankruptcy Court

On Wednesday night, Bankman-Fried sent an internal message to employees that sounded particularly powerless: “I am very sorry, the responsibility is indeed mine.” At this point, the FTX website displayed “Unable to process withdrawals,” Alameda’s site was made invisible, and the entire empire was in deadlock.

Regulators such as the U.S. Commodity Futures Trading Commission launched investigations. Bankman-Fried’s scheduled speech at Goldman Sachs on Thursday was canceled.

From a net worth of $16 billion to the brink of bankruptcy—this is not just a loss of favor for one person but a profound reflection on the fragility of the crypto industry itself. The FTX incident clearly demonstrates that in areas lacking proper regulation and risk management systems, no matter how glamorous the packaging, it cannot support a skyscraper built on emptiness.

For the entire crypto market, this may serve as a necessary “cleansing”—forcing the industry to face risks, improve mechanisms, and increase transparency. Otherwise, the next FTX could be waiting just around the corner.