FTX Crash: What Investors Should Know

FTX, a major cryptocurrency exchange, and FTX.US, its U.S. branch, have filed for Chapter 11 bankruptcy, the company announced Friday. Founder and CEO Sam Bankman-Fried has resigned, the release noted; the new CEO is John J. Ray III, who led the infamous energy giant Enron through its bankruptcy and liquidation process about two decades earlier.

The exchanges crashed amid liquidity concerns and allegations of misused funds, followed by a large volume of withdrawals from rattled investors. The value of FTX’s native token, FTT, plummeted, taking other coins with it, including Ethereum and Bitcoin, which reached a two-year low as of Wednesday afternoon.

The impact of FTX’s crash could have wide-reaching implications throughout the crypto market because cryptocurrencies and exchanges with exposure to FTT or FTX could face sinking prices and financial troubles.

Here’s what this week’s events mean for major exchanges, U.S. investors and future crypto regulations.

These are the key points:

• FTX is a cryptocurrency exchange founded by Sam Bankman-Fried in 2019, who served as CEO until Friday. The exchange issues its own token, FTT, and was the fourth-largest crypto exchange by volume as of Tuesday.

• Bankman-Fried also founded a crypto trading firm called Alameda Research; CoinDesk reported on Alameda’s troubled balance sheet Nov. 2. Its largest assets, according to the report, are billions of dollars worth of FTT.

• Changpeng Zhao, CEO of rival exchange Binance, tweeted Sunday that he was planning to sell off Binance’s stockpile of FTT because of “recent revelations that have came to light,” referring to the Nov. 2 CoinDesk report of FTX and Alameda’s blurred funds. He compared FTX’s situation to the crash of TerraUSD and LUNA this year that tanked the crypto market and cost investors billions of dollars. But typically, such moves aren’t announced publicly.

• Zhao’s announcement led to a rapid decline in FTT’s value over the next day as suspicion grew that FTX didn’t have the liquidity needed to back transactions and stay afloat. The value of other coins — including BTC and ETH — declined as well, with Bitcoin dropping to a two-year low. Bankman-Fried said in a tweet Thursday that the platform saw $5 billion in withdrawals Sunday.

• Zhao and Bankman-Fried struck a deal for Binance to acquire the non-U.S. branch of FTX. The exchange CEOs signed a nonbinding letter of intent Tuesday, essentially promising to bail out the failing exchange to prevent a larger market crash.

• Binance withdrew from the deal. Within a day, Zhao posted on Twitter that Binance had completed its “corporate due diligence” and said it would not be acquiring FTX. Zhao tweeted that the news reports of “mishandled customer funds” and “alleged U.S. agency investigations” contributed to his decision. Bankman-Fried appeared to reference Zhao’s influence on FTX’s fall in a cryptic post on Twitter where he said, “Well played; you won.”

• On Tuesday, FTX halted all non-fiat customer withdrawals. On Twitter, Bankman-Fried posted a string of apologies explaining FTX’s liquidity issues and promising more transparency.

• Bankman-Fried told investors that Alameda owes FTX about $10 billion, which FTX loaned to Alameda using customer deposits, according to a recent report by The Wall Street Journal. But before making the loan, FTX had just $16 billion in assets, according to the report, meaning it lent out more than half of its assets.

• On Thursday, FTX.US posted a warning on its website for users on the log-in screen, noting that trading “may be halted on FTX US in the next few days.” The message told users to close any positions they wanted to and that withdrawals would remain open.

• On Friday, FTX announced that it had filed for voluntary Chapter 11 bankruptcy proceedings for FTX, FTX.US and Alameda. Chapter 11 bankruptcy allows businesses to restructure their debt and continue operations, unlike Chapter 7 bankruptcy, where assets are liquidated.

• FTX.US also froze withdrawals on Friday, following the bankruptcy announcement, despite earlier reassurances that FTX.US was not affected by FTX’s liquidity troubles.

• FTX and FTX.US wallets were drained on Friday evening in an apparent hack. More than $600 million was drained from the wallets, CoinDesk reported. FTX posted about the hack on its support channel the instant-messaging service Telegram, saying, “FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t go on FTX site as it might download Trojans.” Trojans are malware disguised as legitimate software.

• FTX general counsel Ryne Miller posted on Twitter the same evening that the company would expedite moving remaining assets to cold storage — meaning offline — because of the “unauthorized transactions,” referring to the apparent hack.

What does this mean for U.S. customers?

FTX’s Chapter 11 bankruptcy filing included FTX.US, according to the press release. The companies aim to “maximize recoveries for stakeholders,” said Ray, the new CEO, in the release. But as of publication time, guidance for affected investors wasn’t available.

Several users reported their wallets were drained as of Friday evening, following the apparent hack. Earlier that day, FTX.US had frozen consumer withdrawals.

The bankruptcy filing is a stark contrast to Bankman-Fried’s previous statements. Earlier this week, he had emphasized that the liquidity issues concerned FTX International, not FTX.US, the American branch of the exchange, which is subject to more regulation. Bankman-Fried tweeted Thursday that the FTX.US exchange is “100% liquid,” meaning users could fully withdraw all of their invested funds.

What does this mean for the U.S. crypto market?

FTX’s troubles have had a profound effect on the U.S. crypto market:

• Bitcoin’s price dipped below $16,000 on Wednesday.

• Ethereum dipped below $1,100 on Wednesday.

• Solana dipped below $13 on Wednesday after CoinDesk’s report that Alameda held a large amount of it.

• Tether briefly depegged from the U.S. dollar, dropping by 3% on Thursday.

Cryptocurrency is a relatively risky investment and should be treated accordingly. High-risk investments should make up a small part of your overall portfolio, and diversifying the range of cryptocurrencies you buy can help minimize risk.

I’m worried about keeping my crypto with an exchange. What should I do?

Consider moving your digital assets to a separate crypto wallet. Most exchanges allow you to transfer assets to these wallets, which can be online (on a separate platform) or offline (on a thumb drive with added security features).

Which exchanges are exposed to the FTX crisis?

With such high volatility and so many customers unable to withdraw their funds from FTX, investors are concerned about the fate of their assets on other exchanges. Here’s how major exchanges are affected:

• FTX and FTX.US have frozen withdrawals and filed for Chapter 11 bankruptcy. FTX is under scrutiny from the Securities and Exchange Commission, or SEC, and Commodity Futures Trading Commission for its handling of client funds, Reuters reported. The investigation began several months ago. FTX hasn’t responded to NerdWallet’s request for comment.

• BlockFi has frozen withdrawals. The company said in a post on Twitter it learned of the FTX news through Twitter and, due to the lack of clarity, would not be able to operate business as usual. Previously, FTX was set to acquire BlockFi, and FTX.US had extended BlockFi a $400 million line of credit.

• Binance.US, the U.S. branch of Binance, which is separately managed, posted on Twitter that Binance’s dealings with FTX would not affect U.S. users.

• Coinbase CEO Brian Armstrong tweeted that the platform has no material exposure to FTX, FTT or Alameda.

• Gemini co-founder Cameron Winklevoss tweeted that the platform has no material exposure to FTX, FTT or Alameda.

• Robinhood told NerdWallet that the service has no direct exposure to Alameda, FTX or any of its entities. FTT can’t be traded on the platform. FTX’s Bankman-Fried has a 7.6% stake in Robinhood.

• EToro told NerdWallet that the platform has no corporate exposure to FTX or FTT. Users can trade FTT on EToro, though this isn’t applicable to U.S. users.

• Kraken told CoinDesk that the platform has no material exposure to FTX or Alameda and does not support FTT trading.

• Crypto.com CEO Kris Marszalek tweeted that the company’s direct exposure to the “FTX meltdown” is “immaterial,” amounting to less than $10 million in the company’s own capital. The platform did suspend withdrawals of stablecoins USD and USDT on the Solana network but did not explain why.

How will this affect crypto regulation?

U.S. exchanges are subject to more regulation and reserve requirements than international exchanges. But recent events might cause more regulatory scrutiny. In a Twitter post Wednesday, Sen. Elizabeth Warren, D-Mass., called for more aggressive enforcement and said she was pushing the SEC to protect consumers.