What happened at FTX?

Newsletter of the week 5 November - 12 November. This week’s newsletter covers EVERYTHING to do with the FTX meltdown, Crypto.com FUD, Bitcoin price action, and the DJIA's price action.
by Yoaquim Boom
November 29, 2022

In this week’s report

  • What exactly happened to FTX
  • Binance’s involvement in the FTX meltdown
  • The Bitfinex and more aftermath
  • The Crypto.com scare and fear
  • Bitcoin price action review
  • US30 + NASDAQ price action review

What EXACTLY Happened to FTX?

The sudden collapse of FTX, the world’s third-largest cryptocurrency exchange, took the world by storm over the last two weeks.

One more event that has hurt the entire industry and the reputation of many legit innovators and technicians.

The FTX collapse, to the intelligent investor, merely showcases how important it is for any investor to learn about the risks they take when they park their money in any investment, especially a more risk-on investment such as FTX proved to be.

FTX and its affiliate companies filed for bankruptcy on November 11. The company’s founder, Sam Bankman-Fried (SBF), resigned from his position as the CEO of FTX on the same day.

FTX, based in the Bahamas, held about $16 billion in customer assets but had apparently lent about $10 billion of those funds to Alameda Research, a trading firm run by Bankman-Fried and friends.

Later it was found out that Alameda Research, in turn, had lent out billions of dollars to other third-party entities,  with many of those loans secured by the FTX exchange's native token, FTT.

As we covered last week, the value of FTT crashed rapidly after Binance CEO Changpeng "CZ" Zhao had announced they would be selling all of their FTT tokens due to "recent revelations" which referred to the above-mentioned lack of funds on the FTX exchange and poor money management at the Alameda Research firm.  

Due to the fear created after CZ publicly announced Binance's FTX selloff, FTX faced $5 billion in customer withdrawal requests quite immediately. This left FTX facing an $8 billion shortfall, according to Bankman-Fried.

On top of this rumors have begun to spread that Alameda Research Top Exec. Caroline Ellison, Sam Bankman-Fried, and other Alameda employees had been engaging with one another in a "sex cult".

This rumor likely spread through the rumor of Alameda Research's top exec. Caroline Ellison has been Sam Bankman-Fried's ex-girlfriend, who allegedly only obtained her position due to her sexual relations with Bankman-Fried.

Caroline Ellison, who was partially in charge of the trades and relations at Alameda, has been noted previously stating "we tend not to have things like stop losses, I think those are not necessarily a great risk-management tool".

This lack of technical understanding and understanding of trading has been apparent in the billions of dollars lost at the fund.

FTX CEO Sam Bankman-Fried  


Did FTX get Hacked?

Right after the events previously mentioned FTX was 'hacked', which many believe to have been an inside job to take the last funds out of the FTX account and to the private wallets of investors and higher-ups of the FTX company.

More than $600 million was siphoned from FTX's crypto wallets during this hack.

"FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don't go on the FTX site as it might download Trojans," wrote an account administrator in their FTX Support Telegram chat.

The transfers occurred on the same day that the firm filed for bankruptcy.

Previously mentioned suspicions arose due to the vagueness and convenience of it all. The rumor of whether someone inside the company might've been responsible rather than an outside attack was quick to circulate online.

Most Affected Projects by FTX Meltdown

Quickly after the FTX crash BlockFi, a crypto lender announced it would halt withdrawals from their platform due to "the lack of clarity on the status of FTX... and Alameda" (Fig. 1), which began a ripple of fear, uncertainty, and doubt, for all users with their funds on centralized exchanges or other centralized networks.  

BlockFi and FTX US announced this past July that the companies had agreed to a deal wherein FTX US would provide BlockFi a $400 million credit, which would then allow FTX US the right to acquire BlockFi at a price of up to only $15 million.

A Reddit user by the name of 'coiiiii' was quick to announce a list of different cryptocurrency projects that would be most affected by FTX and had direct relations.

Some of these include major names in the space such as Yuga Labs, Circle, Genesis Digital Assets, NEAR protocol, BlockFi, Aptos, Nova Labs, MINA, Polygon, Solana, and Voyager Digital.

The effects of the crash can be delayed in any project, so it remains to be seen what the true effects of the FTX and Alameda Research bankruptcy are.

Fig. 1 BlockFi Message

The Crypto.com FUD

Crypto.com had 'Mistakenly' sent up to $400M Worth of Ethereum to the wrong address over the weekend. This sum was quickly retrieved, although it created extreme fears for users of the exchange and platform.

In late October, a substantial amount of ETH (worth approximately $400 million) was sent from Crypto.com to Gate.io. However, these tokens were supposed to go to a cold storage address but "mistakenly" ended up in Gate.io, crypto.com CEO Kris Marszalek noted on Twitter.

Following the unprecedented collapse of FTX, all major cryptocurrency brokers revealed their cold storage addresses, where they keep most of their customers' tokens in the spirit of transparency.

Marszalek posted the cold wallet addresses for some of the top assets on Crypto.com last week. Soon after, users were quick to spot a suspicious transfer of 320,000 Ether. One user, Conor Grogan, pointed out the $400 million transaction between Gate.io and Marszalek's firm on October 21st.

This caused a mass exit from crypto com and a lot of fear spread. (CRO) CRONOS, the local cryptocurrency of the crypto.com chain crashed over 40% on the day.

What is Next For Crypto?

FTX has now joined many other fallen projects — including Terra Luna, Hedge Fund Three Arrows Capital, Celsius, and Voyager.

Due to this destruction seen in the crypto space, Binance CEO Changpeng “CZ” Zhao, although having still played a decent part in the crashes, noted on these collapses that he envisions an era of greater regulatory scrutiny in the near future.

CZ stated: “I think basically we've been set back a few years now. Regulators rightfully will scrutinize this industry much, much harder, which is probably a good thing, to be honest."

A great way to end it, and an unfortunately true thing to say. The trust that was built has collapsed largely, although eyes will turn to crypto again in due time.

Bitcoin Price Analysis

Due to the FTX events, Bitcoin saw a massive selloff on Tuesday.

The total crash since the fear of FTX's insolvency began amounts to over 25%. This drop forced Bitcoin to new lows, breaking its June lows of 17.5k.

The new low was set in at approx. 15500. If we don't see a strong 'V-shape' recovery off these levels soon, we are bound to much lower, soon.

In the latter case, final targets could be as low as 9k.

Fig. 2 1D BTC Mar 2022 - Nov 2022 (TradingView)

Dow Jones Price Analysis

The stock market remains relatively unchanged, continued strength is to be seen across all stocks. All the major indices such as the Dow, S&P, and NASDAQ are up significantly since last week with the Dow Jones Industrial Average putting in a rally of over 3%.

The pullback we continuously speak about has not yet truly occurred, but the zone in which price action currently resides remains the key area for shorts to pile in.

A rejection is imminent with no new positive or negative high-impact news being expected any time soon. This lack of high-impact news means the market movement will be largely dependent on investor conviction and trading action.

As an investor, I am still extremely cautious due to the global economic situation, And as a trader, this looks like the perfect spot to see a strong rejection.

The key long-term levels for the Dow at 26000-27000 currently sit at the bottom of the channel. Under the right conditions, these levels will likely be reached before the beginning of Q2 2023.

Fig. 3 1D DJIA Dec 2019 - Nov 2022 (TradingView)