What the FTX Just Happened?

Geoffrey Miller
Geoffrey Miller
What the FTX Just Happened?

In case you haven't noticed, our present crypto winter is getting colder. The FTX exchange is on the brink of collapse, pulling down the price of cryptocurrencies across the board. Bitcoin plunged from $21.5K to $15.5K USD, Ethereum tumbled from $1.6K to $1K USD, and Solana is in free fall, having sunk 70% to $12 from its high of $39 USD earlier this week.

The only silver lining for the Internet Computer community is that ICP was not impacted as severely as many other coins. Indeed, ICP price has, fortunately, rebounded from $3.50 and is currently sitting at $4.21 USD.

While further modest upward corrections are expected, the damage is done. Sam Bankman-Fried, the owner of FTX, best summed up the current situation in his apology to employees: "I'm sorry. I fucked up".

And, it gets worse. Binance has now pulled out of a deal to save FTX. The shockwaves will be felt across the globe. In my opinion, this may turn out to be the worst crash in crypto history.

I believe the digital world is about to learn the same, difficult lessons of the 1929 stock market crisis: exchanges do not automatically have investors' best interests in mind, the financial competency of exchange owners cannot be assumed, and a degree of regulation, oversight, and monitoring by governments is necessary to keep things from going off the rails.

So what happened, and how did we get here? And why was Solana disproportionately impacted?

Alleged Dirty Deeds, Done Dirt Cheap

An exchange shouldn't have liquidity problems. However, FTX does not appear to have been operating purely as an exchange. Instead, Sam Bankman-Fried may have intertwined finances with his crypto trading firm, Alameda Research, which backs Solana.

One allegation, among many, is that Sam Bankman-Fried was borrowing from himself and keeping it hidden, using his own exchange's FTT coin to pull up the asset's value by its own bootstraps. The truth is not yet fully known, but people are understandably upset by the possibility.

"It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token", remarked Cory Klippsten, CEO of Swan Bitcoin. Fascinating is undoubtedly one way to describe it.

While it may not be illegal, propping up Alameda Research with a crypto coin invented by FTX rather than with an independent asset puts the organization's value on shaky ground. And this is not the only financial trick of which critics have accused Sam Bankman-Fried.

Rumors of Sabotage and Intrigue

According to Ben Armstrong, one of the most influential crypto commentators in the anglosphere, Sam Bankman-Fried has been strategically undermining competitors. Allegedly, he's been doing this by listing emerging coins early on FTX, pumping up the price artificially via institutional purchases, and then dumping on retail customesrs.

While judgment should be reserved until all facts are known, if true, this would explain the price pattern at ICP's launch. The DFINITY Foundation had no control over the starting list price of the Internet Computer's governing token.

In an ironic twist, critics of ICP may have been right all along about a rug pull - they just blamed the wrong suspect. Meanwhile, ICP has been delivering on its technological promises, working hard to grow its Dapp ecosystem, and waiting for the truth to win out.

The Difficult Path Ahead

After this week, crypto may never be the same again. In the final analysis, that might be a very good thing. We can't have a wild west situation in cryptocurrency forever - people's livelihoods depend on enforcing checks and balances on the whims of the marketplace.

While the story of Alameda Research and the Solana cryptocurrency it backed may be coming to a tragic and dramatic end, we can work together to ensure ICP's story is just getting started.

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