FTX, once the second largest cryptocurrency exchange in the world, is now worthless, according to one of the company’s early investors.
In a note to partners, the venture capital firm Sequoia announced it had written down its investment in FTX, worth $150m (£130m), to nothing.
“In recent days, a liquidity crunch has created a solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0,” the investors wrote, in a message signed Team Sequoia.
Binance and FTX logos. Photograph: Dado Ruvić/Reuters
Other investors have lost similar sums, including the Ontario Teachers’ Pension Plan, which last year invested about $400m in the exchange, valuing FTX at $25bn.
The cryptocurrency market came under pressure after the FTX crisis, with the cornerstone digital asset, bitcoin, falling 7.6% over the past 24 hours to $16,775 and the second largest, ethereum, falling 4.4% to $1,205.
What is cryptocurrency?
Cryptocurrencies are an alternative way of making payments to cash or credit cards. The technology behind it allows the ‘money’ to be sent directly to others without it having to pass through the banking system. For that reason they are outside the control of governments and are unregulated by financial watchdogs – and transactions can be made in a way that keeps you reasonably pseudonymous.
If you own a crypto-asset you control a secret digital key that you can use to prove to anyone on the network that a certain amount of that asset is yours. If you spend it, you tell the entire network that you have transferred ownership of it, and use the same key to prove that you are telling the truth. Over time, the history of all those transactions becomes a lasting record of who owns what: that record is called the blockchain.
Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its creation in 2009, sometimes surging in value as investors have piled in – and recently crashing back down.
Sceptics warn that the lack of central control make crypto-assets ideal for criminals and terrorists, while libertarian monetarists enjoy the idea of a currency with no inflation and no central bank.
The whole concept of cryptocurrencies has been criticised for its ecological impact, with “mining” for new coins requiring vast energy reserves and the associated carbon footprint of the whole system.
Richard Partington and Martin Belam
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The bank run-style “liquidity crunch”, fuelled by a rush of withdrawals from FTX, led to a pause in all cash outflows on Tuesday morning. But for the crunch to have become a solvency risk would suggest that the company had been investing customer deposits in illiquid assets, forcing it to choose between a rushed sale at depressed valuations, or a halt on withdrawals altogether.
In posts sent shortly before FTX was engulfed in crisis, its owner, Sam Bankman-Fried, insisted that was not the case. “FTX is fine. Assets are fine. FTX has enough to cover all client holdings,” he said in tweets that he has since deleted. “We don’t invest client assets (even in treasuries).”
Since then, Bankman-Fried has changed his messaging, telling investors that the company needs $8bn to cover withdrawal requests, according to multiple reports.
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The sudden collapse in value was prompted by leaked documents which implied that Alameda Research, a hedge fund tightly intertwined with FTX through its common owner, Bankman-Fried, was in effect insolvent.
Alameda’s accounts rested on a token, FTT, that was issued by FTX and had no value other than that guaranteed by the exchange, according to the documents.
That revelation turned into a crisis when Binance, the largest cryptocurrency exchange, announced it would sell its own major stake in FTT. The fire sale that followed crashed the value of the token far below the $22 floor that FTX had committed to support, and prompted the equivalent of a bank run at FTX itself, as customers raced to withdraw their deposits faster than the exchange could process them.
The fight between the two exchanges briefly turned into an alliance, as Binance agreed to make a non-binding offer to bail FTX out and merge with it. But on Wednesday night, the deal fell through.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance said.