“liquidity crunch” in the context of FTX


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

In: 1

In other words, a huge portion of FT token holders and FTX non-US accounts are wanting to sell/withdrawal their holdings associated with the platform and token, thus heavily driving the price towards zero since there’s few buyers.

There was no 1:1 backing of deposits. No institution really does this, but usually there’s enough money moving behind the scenes that it doesn’t matter and people aren’t focused on selling just one asset that itself is vulnerable to not having enough buyers/sellers. If enough people try to pull from an over-leveraged exchange, this can happen.

It wasn’t that the money always went to the exchange anyway, they weren’t buying ice cream at an ice cream shop. Transactions among lots of currencies happened all at once.

Traditional stock markets control for this behavior somewhat as well. Digital crypto exchanges are somewhat at the mercy of price fluctuations, sometimes it isn’t even all one party’s fault. But minting your own currency tied to your own exchange is a very interesting thing that certainly the NYSE isn’t doing. You don’t first buy ‘NYSE bucks’ to trade stocks like it’s Chuck-E-Cheese. It’s all dollars and no stock is really using a medium of exchange that different from any other stock.

When your CEO says stuff like this… I mean… good grief, what do we expect to happen?
>>In 2021, FTX signed a 19-year deal to rename the Miami Heat’s basketball arena as the FTX Arena. In 2021, Bankman-Fried said that buying Goldman Sachs was “not out of the question at all.”

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.