“liquidity crunch” in the context of FTX

Question

I’m guessing they had not much money and every customer decided to withdraw their deposits on the same day?

In: 1

Answer 1

In the case of FTX specifically, a lot of the liquidity they were relying on to cover withdrawals was in the form of their own crypto token. A bank that covers its obligations with its own proprietary money is an inherently shady idea, and FTX had been keeping this quasi-secret. Once it came to light in recent public filings, lots of investors lost confidence in the token and the exchange. This created a vicious cycle where the value of the token fell, so more was needed to cover any given withdrawal, so the value of the token continued to fall, etc. Eventually FTX just stopped processing withdrawals, and every other player who could underwrite its recovery has looked at its books and run screaming.