FTX Collapse: How Customer Deposits Were Used to Fund Speculative Trading

The collapse of FTX in November 2022 sent shockwaves through the cryptocurrency market. Founded by Sam Bankman-Fried, a young entrepreneur who became a prominent figure in the industry, FTX was one of the largest exchanges in the world, with over a million users and billions of dollars in customer deposits.

Bankman-Fried's rise to fame was swift, with him appearing on magazine covers and testifying before Congress. He was described as the 'J.P. Morgan of crypto' due to his efforts to bring stability and legitimacy to the industry. However, behind the scenes, FTX was using customer deposits to fund speculative trading and other activities, in clear violation of the terms of service and basic legal duties.

The company's sister firm, Alameda Research, held an unusually large portion of its assets in FTT, the internal exchange token, raising questions about the true value of these assets. A leaked balance sheet obtained by a journalist at CoinDesk exposed this practice, leading to a collapse in the price of FTT and a subsequent bank run on FTX.

Within 48 hours of the article's publication, withdrawal requests exceeded the cash FTX had on hand, causing the exchange to pause withdrawals. This confirmation of worst fears led to the filing of bankruptcy, leaving many customers still waiting for their funds to be returned years later.