FTX’s Unbelievable Recovery: How Customers Got Their Money Back | EP 27
Description
In this episode of UNinvested, Sahil explores the surprising turn of events for FTX and its customers. Despite the infamous bankruptcy in November 2022 that left many fearing they'd lost everything, recent developments show that almost all customers will receive their money back. Sahil discusses the history of FTX, the rise and fall of its founder Sam Bankman-Fried, and the intricate details of how the failed cryptocurrency exchange managed to recoup enough funds to repay its customers. This episode provides a comprehensive look at the lessons learned from one of the biggest financial scandals in recent history.
What we explore:
The rise and fall of FTX and its founder Sam Bankman-Fried
The initial success and subsequent collapse of FTX in November 2022
The role of CoinDesk's report in triggering FTX's downfall
The details of FTX's bankruptcy and the massive debt owed to customers
The analogy of FTX's situation to a bank's mismanagement of savings deposits
How FTX managed to recover funds and repay customers
The impact of cryptocurrency appreciation and strategic investments on FTX's recovery
The ongoing repercussions of the FTX scandal in the finance and crypto world
Where to find Uninvested:
Website: https://www.uninvested.org/
In this episode, we cover:
[00:00:00] Introduction and the ongoing relevance of Sam Bankman-Fried and FTX
[00:00:07] Recap of FTX's history and initial success
[00:00:13] The intuitive and powerful nature of FTX as a cryptocurrency exchange
[00:00:20] The peak of FTX's popularity and its significant valuation
[00:01:27] The triggering event of FTX's downfall: CoinDesk's report
[00:01:41] The role of the FTT coin and Binance's impact on FTX's asset value
[00:02:27] FTX's bankruptcy and the revelation of its financial mismanagement
[00:02:54] Comparison to a bank's mismanagement of savings deposits
[00:03:07] The recent positive development: FTX customers to receive their money back
[00:04:00] The reality of customer losses despite the repayment
[00:04:51] How FTX managed to free up liquid cash to repay customers
[00:05:27] The appreciation of cryptocurrencies and notable investments aiding FTX's recovery
[00:05:33] Reflection on the FTX scandal and its implications for the crypto industry
[00:05:39] The arrest of Binance's CEO and the future of the crypto industry
[00:05:51] Closing remarks and the continued impact of the FTX scandal
It’s May 2024 and we are still talking about Sam Bnakman Friedman (also known as SBF) and FTX, the failed cryptocurrency exchange that set the world on fire in November 2022 when it went bankrupt losing billions - owing $11.2B to be exact.
However, this time the story is a slightly positive one. Almost all FTX customers will receive their money back. It was thought they’d never see it again.
Before we jump into details of the recent good news, let’s recap the troubled history of SBF and FTX.
[intro music]
FTX is a cryptocurrency exchange that was founded in 2019. For those that don’t know, that means they allowed anyone to trade crypto like bitcoin, ethereum, even dogecoin (a meme cryptocurrency that somehow has relevance with backing from Elon Musk). The platform was thought to be intuitive enough that everyday traders could use it, kinda like Robinhood is for trading stocks, but it was also powerful enough for professional firms to use it. Even huge funds that spent billions and billions trading used it.
FTX rose to immense popularity with enormous amounts of success. I mean enormous. At its peak, SBF was a billionaire leading the 3rd biggest cryptocurrency exchange valued at $32 Billion with over 1M users.
They were so popular that FTX won the naming rights to the Miami Heat stadium. For a long time the Miami Heat played at the FTX arena.
Then in November 2022, all hell broke loose when CoinDesk, a medium sized media company focused on the crypto space wrote a report that caused people to look into FTX’s balance sheet - what assets the company had, what liabilities, etc.
People found that FTT, a crypto currency coin created by FTX, was a major asset for the firm.
This isn’t really a problem until it is. What I mean by this is that as long as the value of the FTT coin remains high, the value of FTX’s assets will remain high.
However, Binance, another crypto currency exchange, sold all of its FTT very quickly, which dropped the price of FTT and led to FTX having substantially lower asset value. The assets of FTX is how it will be able to pay back its customers. With customers fearful, they began to try and pull out all of their money. Customers attempted to pull billions of funds out of FTX, but FTX didn’t have the liquid cash to provide them. They may have had other assets worth the billions people tried to take out but at the time they didn’t have billions in easily moveable cash. This will be important to remember as we jump to today.
All this led to FTX going bankrupt. It was revealed that FTX owed $9B, but only had $900M in quote on quote liquid cash. Investigations also reveal lots of crime by SBF and his conspirators that wound them in jail. But we won’t get into this now, we did discuss it in more depth in 2 other episodes of UNinvested.
If you’re a little confused, a quick analogy may help.
Imagine that if you put money in a savings account and the bank decided to invest that money into stocks and a house. The stock is super easy to trade and you can convert it into cash easy, but a house not so much. Now imagine that stock’s price crashed and is worth way less than when the bank bought it. At the same time, everyone tries to take out money from their savings account.
The bank simply can’t give everyone their money back because that stock is not worth enough and they can’t sell the house.
As I’m sure you guessed, the bank is FTX, the stock is the FTT coin, the house is all other FTX assets, and the savings deposits are the money customers put into FTX
Now as we look at the present day, there is a happy ending after all because 98% of customers that put money into FTX (or the savings deposit in the previous analogy) will get 118% of what they originally put in. The 2% of people who won’t get paid back the 118% are those that had claims / were owed over $50K.
Now the 118% may sound like a great deal for people, but in reality the customers still lose. The 118% does not come close to making people whole when you consider the money that customers could have made in the time since they lost their funds and crypto in november 2022.
Back then at the time of bankruptcy, one bitcoin was worth $16,080. Today one bitcoin hovers around $62K. That’s about a 290% loss for customers.
And you're probably wondering how FTX is suddenly able to pay customers, after filing for bankruptcy.
Well that’s because FTX was finally able to sell their house, and by house I mean all their other assets to free up roughly 14 to 16 billion in liquid cash.
That appreciation in cryptocurrencies helped FTX as their other crypto investments have raised in price substantially along with a few other notable investments, including a stake in anthropic AI, which is the OpenAI competitor that produced Claude to rival ChatGPT.
That stake in antropic AI is worth almost a billion.
While this ending could be looked at as happy or sad the FTX scandal still rings in the finance world today. Quick side note, the CEO of Binance, the company that started all of this, also went to jail earlier this month.
Despite all of this, the crypto industry is still thriving. Maybe it took taking out the bad eggs to move to a better future.
In the meantime, I’m Sahil and thank you for listening to UNinvested. I'll be back for the next episode on every other Thursday at 6 pm.
Peace.
