Crypto as a concept isn’t the reason that FTX failed and SBF went to jail, but crypto as a volatile asset class is definitely one head of Cerberus.
The first head was that FTX and Alameda operated as a run-of-the-mill Ponzi scheme. That was illegal, and ultimately why SBF is in jail, but it would have all worked out if not for the volatility of the crypto market.
Starting in about January of 2022, the crypto market took a steep dive. By the fall of 2022, Bitcoin was worth less than half what it was at the beginning of the year. The entire crypto market followed roughly the same line: ~$2.75T => ~$1T.
Alameda was a hedge fund that traded in crypto. FTX was an exchange that allowed consumers to buy and sell crypto. Both very exposed to the Crypto Winter. The traders inside Alameda feverishly tried to minimize losses and find gains on the short side, eventually needing more funds than existed without “borrowing” the FTX customer money. Yes, they just took the money out of the FTX customer accounts to use for trading in the hedge fund. Consumers with accounts in FTX overreacted to negative news and swings and exacerbated the already tenuous situation, eventually trying to cash out their accounts. That created a gap in what FTX should have had in its customer funds versus what it actually had.
Crypto as a concept, although I’ve stated not the reason for the collapse, did play a minor role. One difficult, confusing, and sometimes shady aspect of the crypto world is the abundance of bullshit coins and tokens. Coins and tokens are not exactly the same thing, but for our purposes here, we’ll just use tokens to refer to both. We all know Bitcoin, you might have heard of Ethereum, and if you’re crypto-curious, you probably know Solana. However, thousands of (mostly bullshit) tokens exist to be traded, much like penny stocks. Anybody with a computer and a dream can create their own blockchain or create an application on an existing blockchain to make any new token for any purpose. It’s basically that simple.
FTX used this approach and created its own tokens, named FTT. Think of an FTT token just like a share of stock in FTX. The token’s value was tied directly to the value of the company. Therefore, a large portion of FTX’s valuation was tied to the value of its own FTT tokens.
Cue the asset class drop, the FTX – Alameda Ponzi with frazzled traders, the frightened consumers trying to pull their money out of the exchange, and the drop in value of the FTT token. Roll that all together, and you get an exponentially dropping valuation for the company. Eventually, in November, the balance sheet flips over. FTX is insolvent. They file for bankruptcy.
Next, we’ll tackle how the people themselves became the third head of Cerberus.
