FTX was in talks two months ago to raise 1Billion equity at 32Billion valuation. Binance threatens to sell its holdings of FTX tokens and it all crumbles? How isn’t this a big Ponzi scheme?
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FTX is primarily an exchange. You put in either actual money or crypto tokens, and FTX lets you trade them with other people.
Exchanges charge transaction fees when you trade, so in theory, they could just hold people’s assets, facilitate the trades, make money, and call it a day. In that hypothetical world, every dollar in someone’s FTX account is backed by a dollar in FTX’s corporate account, and all the crypto tokens are backed 1:1.
However, they look at all this money, especially the dollars, and say, “hey, let’s reinvest this, and we’ll earn some interest on it and boost our profits.” So now, they’re not holding dollars 1:1, they’ve got some other assets they bought.
Now, we don’t know what all they bought with people’s dollars, but since they’re a crypto company, they probably bought crypto.
Ok, so what seems to have happened is people got spooked, and wanted to take their money out. When a lot of people do this, FTX doesn’t have the dollars, and needs to sell their crypto. At the same time, people were losing confidence in FTT, which is a token that FTX had a lot of. Both these things drive down the price of crypto meaning that FTX was having trouble getting enough real money to pay the withdrawals.
This isn’t a classic Ponzi scheme where new investors money goes to pay returns for old investors; more like your gambling-addict stepdad losing the rent money.
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