FTX, once the world’s second largest cryptocurrency exchange, is now worthless, according to one of the company’s early investors.
In a note to partners, venture capital firm Sequoia announced it was writing down its $150m (£130m) investment in FTX.
“In recent days, the liquidity crisis created a solvency risk for FTX. The full nature and extent of this risk is currently unknown. Based on our current understanding, we are marking down our investment to $0,” the investors wrote in a message signed by Team Sequoia.
Other investors lost similar amounts, including the Ontario Teachers’ Pension Plan, which last year invested about $400 million in a stock that valued FTX at $25 billion.
The cryptocurrency market has been under pressure since the FTX crisis, with cornerstone digital asset bitcoin down 7.6% to $16,775 in the past 24 hours, while second largest ethereum fell 4.4% to $1,205.
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What is cryptocurrency?
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Cryptocurrencies are an alternative way to pay with cash or credit cards. The technology behind it allows you to send “money” directly to others without going through the banking system. Because of this, they are outside the control of governments and are not regulated by financial regulators, and transactions can be made in a way that keeps you reasonably anonymous.
If you own a crypto-asset, you control a secret digital key that you can use to prove to anyone on the network that you own a certain amount of that asset. If you spend it, you’re telling the entire network that you’ve transferred ownership of it, and you’re using the same key to prove you’re telling the truth. Over time, the history of all these transactions becomes a long-term record of who owns what: this record is called a blockchain.
Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its inception in 2009, sometimes rising in value as investors piled in — and recently crashing again.
Skeptics warn that the lack of central control makes crypto-assets ideal for criminals and terrorists, while libertarian monetarists relish the idea of inflation-free and central-banked currencies.
The whole concept of cryptocurrencies has been criticized for its environmental impact, requiring “mining” for new coins. large energy reserves and associated carbon footprint of the entire system.
Richard Partington and Martin Belam
A bank-style “liquidity crunch” caused by the rush to withdraw from the FTX caused a pause in all cash outflows on Tuesday morning. But the transformation of the crisis into a solvency risk means that the company is investing customer deposits in illiquid assets, forcing it to choose between depressed prices and hasty sales or a complete withdrawal.
In messages sent shortly before FTX collapsed, owner Sam Bankman-Fried insisted that this was not the case. “FTX is good. Assets are good. “FTX has enough power to cover all client holdings,” he said. “We don’t invest in client assets (even treasuries).”
Since then, Bankman-Fried has changed its message, telling investors it needs $8 billion to meet the company’s withdrawal demands, according to multiple reports.
The sudden collapse in value was caused by leaked documents showing that Alameda Research, a hedge fund closely linked to FTX through its common owner Bankman-Fried, was effectively bankrupt.
Alameda’s accounts were based on the FTT token, which was issued by FTX and had no value other than that guaranteed by the exchange, according to the filing.
The announcement turned into a crisis after the largest cryptocurrency exchange, Binance, announced that it would sell its majority stake in FTT. The subsequent fire sale plunged the token’s value well below the $22 level that FTX had committed to supporting, and caused a bank run on FTX itself as customers raced to withdraw their deposits faster than the exchange could process it.
The battle between the two exchanges briefly turned into an alliance as Binance agreed to make a non-binding offer to bail out FTX. unite with him. But on Wednesday night, the deal is done.
“As a result of corporate due diligence, as well as recent news regarding alleged mismanagement of client funds and US agency investigations, we have decided not to proceed with the potential acquisition of FTX.com,” Binance said.
