How the FTX crypto crash will affect the world
The impact of the FTX crash is not just limited to the investors who invested in these companies. It is also set to affect the crypto industry, the regulations industry, the philanthropist entities, and a shift of money into government-backed treasury bills. This is also set to trigger more crashes in share prices of other related companies (just like it happens in a recession) and reduce trust in 'experts'.
What shook the crypto universe last week? Sam Bankman-Fried is the owner of 2 closely related, now bankrupt crypto companies: FTX and Alameda Research. While FTX is a crypto exchange (a platform that allows people to trade in cryptos, just like NSE or NYSE allows you to trade in equity stocks), Alameda Research is a crypto hedge fund (which invests public money in cryptos). FTX and Alameda, along with more than 130 corporate companies, have just filed for bankruptcy.
Why is this scary? In simple words, a crypto exchange like FTX has a lot of customer funds because people trade in cryptos, and pay real dollars to receive tradeable bitcoins. As per rules, FTX is not supposed to use this money.
- However, FTX loaned half of their customer funds (these real dollars) to Alameda, who in turn used them to bet on other cryptocurrencies and to extend credit help to dying crypto firms like Voyager. The loan amount is about $8-10 billion (ie about Rs 65,000 crore to Rs 81,200 crore).
Now, how did the money disapper?
- FTX issues a token called FTT, which though looks like an equity stock, is more like an airlines-mile program. If you buy these tokens, you don't get an ownership stake in FTX but instead, you get perks like discounts on trading.
- So, you know how listed companies buy back their shares to increase their share prices? Similarly, FTX used its cash profits to buy back its FTT tokens to raise its prices on the crypto exchange. In this way, if the token price is high, the company will do well. But if the token value falls, the company is bound to be in trouble.
- Thus, it held a lot of FTT tokens.
- Now, in its balance sheet, Alameda had about $3.7 billion worth FTT and $2.2 billion worth FTT as collateral against $7.4 billion of loans. So, Alameda was propping up FTX's price and using FTX's risky tokens as ''collateral'' to raise big loans from banks.
- Since having such a large amount of crypto as collateral behind loans was a risky affair, crypto rival Binance said that it was selling all of the FTT tokens it held. This spooked out other investors, who also sold their tokens on the same day.
- FTT's value fell by 78% in a day.
- Now FTX couldn't encash these large number of tokens and thus paused their customers from withdrawing money.
So, how does it affect the world?
1. Ripple effect in the crypto world: Investors were anyway wary of investing in crypto and this disaster has justified people's mistrust in it. Bitcoin was already down by 70% over the year and went down by another 12% in 5 days even after 10 lakh people were barred from withdrawing funds.
2. Faster crypto regulations are bound to come in: As the FTX collapsed, state and federal agencies like the US Department of Justice, the US Securities and Exchange Commission (SEC), and the Bahamas’ Financial Crimes Investigation Branch have launched or expanded investigations into FTX.
There has been ambiguity in crypto regulations so far and this crash is bound to fasten the process. Therefore, a number of criminal and civil actions against the exchange and its executives are bound to come in.
3. Less trust: The crypto world has been stunned by the FTX crash as a lot of people who invested their savings have lost it. This also marks a loss of trust in experts and celeb endorsements because even sharks like Kevin Oleary had recommended FTX just a few weeks ago.
FTX also hired YouTube influencers and high profile celebs to push people to invest in FTX. Gisele Bundchen, Tom Brady and Seinfeld creator Larry David and popular YouTube channel Nas Daily had all promoted him a year ago. In fact, Bankman-Fried was also on the cover of Fortune and Forbes.
So, when real-life experiences don't match predictions of these so-called experts, people are bound to be shocked and lose trust.
4. A withdrawal of funds from other entities: Not just FTX, but as data about related companies goes public, investors are bound to withdraw funds from other companies; thus, reducing their share prices.
5. Money will most likely shift to treasury bills: Since people who managed to save their money from the crypto crash need better options to invest in, money will now move to the government's treasury bills because they will now seem to be a better and safer option.
6. Suspicion over actual philanthropists and political parties: Though FTX started with the concept of 'earn to give' and Nas Daily also called Bankman-Fried one of the most generous persons on the planet, FTX's crash means that money that was bound to be used for good purposes won't be available anymore.
Also, as news of FTX donating large sums of money to Biden's political campaign came across, the general consensus is that people are now suspicious and will pause before investing even in genuine charities and organisations that operate to make a difference.