FTX, one of the world's largest cryptocurrency exchange platforms, is in major financial turmoil.
At its peak, FTX was valued at $32 billion. The company filed for bankruptcy on Nov. 11 after competing offshore crypto exchange, Binance, backed out of a deal to acquire it and users withdrew around $6 billion in funds.
FTX's Sam Bankman-Fried, who often goes by SBF, stepped down as CEO on Friday. He saw his estimated net worth drop by billions virtually overnight as his cryptocurrency exchange platform teeters on the brink of collapse.
Between Nov. 8-9, Bankman-Fried's net worth plummeted to $991.5 million. That's around a 94% drop from his estimated $15.2 billion previously, according to a Bloomberg analysis.
"The fall of FTX could be the moment that really kicks off the broader decline — maybe even demise — of cryptocurrency," James Royal, principal reporter at Bankrate, tells CNBC Make It.
What happened?
Binance CEO Changpeng Zhao, commonly known as CZ, initially invested in FTX in 2019, but later sold his controlling stake in 2021, Reuters reports.
Zhao was paid about $2.1 billion worth of FTT, the native crypto token that gives users access to the FTX trading platform.
Here's why that matters: A leaked balance sheet revealed that the value of Bankman-Fried's crypto trading firm, Alameda Research, was heavily reliant on the value of FTT, according to Coindesk.
So when Zhao announced on Nov. 6 that his company would liquidate any remaining FTT it held due to "recent revelations," it triggered fears among investors that FTX would be unable to pay its debts.
Many began to withdraw their funds, which led to a stark 72% drop in FTT's price. As FTT's price fell, so did the value of FTX's assets that were tied to it.
What happens to crypto traders on the FTX platform if it collapses?
"The first thing traders need to do now is understand the legal duty that an exchange has to them, and whether their assets are held securely," Royal says.
Like many other crypto exchanges, FTX's insurance coverage only addresses certain criminal events such as theft or fraud, Martin Leinweber, digital asset product strategist at MarketVector Indexes, tells CNBC Make it.
"There is no insurance coverage just because the exchange fails," he says. "If there's no bailout, depositors in FTX could lose everything."
How will FTX's downfall affect crypto prices?
In short, it doesn't look good. "The events shook the broader cryptocurrency markets, sending bitcoin and other currencies to two-year lows," Leinweber says.
Bitcoin's price hovered around $17,000 as of Nov. 11, down from above $20,000 on Nov. 8 and well below the peak price of around $68,000 it reached in November 2021.
"With the exception of so-called stablecoins, crypto prices are supported entirely by belief in their future, not by any fundamental underpinning such as assets or cash flow," Royal says.
That means crypto's value solely depends on what someone is willing to pay for it, which is why its price can be subject to erratic fluctuations and dips.
"Crypto has been seen as a lottery ticket, and hypesters have been pumping crypto for years," Royal says. "Unfortunately, it usually takes massive losses for the scales to fall from traders' eyes."
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