FTX Downfall: Case Study

FTX is a cryptocurrency exchange that operates in the fintech industry. It was established in 2017 by Sam Bankman Fried and Gang Wang. Over time FTX has grown into a platform, for trading gaining popularity worldwide.

FTX functions as a trading firm allowing users to trade various digital assets like derivatives, tokens, cryptocurrencies and other financial instruments. It serves as a marketplace that simplifies the acquisition, sale and trading of these assets. Sector or Industry; FTX operates within the cryptocurrency industry. It serves as a platform for individuals and organizations to access and trade assets at the intersection of technology and finance.

FTX offers a range of trading services and products such as leverage tokens, spot trading, futures and options trading tokenized equities, among others. Additionally, FTX provides products like volatility instruments and prediction markets to both customers and retail traders.

FTX caters, to a client base consisting of investors well as retail traders. The platform aims to help people who are new, to the cryptocurrency industry and want a user interface as well as experienced cryptocurrency traders who are looking for advanced trading tools and products.

FTX, a leading cryptocurrency exchange, faced a significant downfall in November 2022, collapsing from a valuation of $32 billion (Reiff ,2023). The reasons behind its failure and subsequent bankruptcy are multifaceted, involving on-chain data analysis and market responses (Vidal-Tomas, 2023). The company's founder encountered legal issues, with the EX-CEO, Sam Bankman-Fried, being arrested in December 2022 (Powell, 2022).

Despite the crisis, there have been recent developments indicating a partial recovery for FTX. As of April 2023, the exchange has reportedly recovered $7.3 billion in assets, benefiting from a rise in cryptocurrency prices (Knauth, 2023).

FTX had a unique selling proposition. They had a very simple user experience that targets new users and lowest exchange charges, compared to the competition.

FTX's journey, as an entrepreneur involves a diverse process that revolves around establishing and effectively managing a state of the art cryptocurrency exchange platform. This intricate process begins with identifying and carefully analysing opportunities within the changing world of cryptocurrencies. From there it requires an approach, to acquiring resources forging important partnerships and setting up the necessary infrastructure to support the platforms growth and long-term success. Successfully navigating the rapidly evolving market is an integral part of this entrepreneurial venture, which calls for smart decision making, adaptability and staying ahead of market fluctuations and trends. (Hoyte & Cherisse, 2015).

The FTX case presents an interplay between the concepts of causation and effectuation, revealing a situation. On one hand, the strategic maneuvering within frameworks to achieve the status of being the tightly regulated cryptocurrency exchange demonstrates a calculated approach that reflects careful planning. However, alongside this achievement, there are challenges that align more with a perspective. The instances of mismanagement and subsequent crash highlight obstacles that arise despite planning, emphasizing the complexities and setbacks encountered along the company’s journey. This combination of perspectives within FTX's story showcases a blend of both logics, where strategic navigation coexists with challenges stemming from circumstances, providing insight into their experience in the cryptocurrency industry. (Sarasvathy, 2006)

On analyzing capital theory, FTX, a cryptocurrency exchange generates capital primarily through various revenue streams such as trading fees and strategic investments. Bourdieu’s concept of capital goes beyond wealth and recognizes that it encompasses diverse forms, including economic resources. In this context, FTX's accumulation of economic capital aligns with Bourdieu’s viewpoint by illustrating that capital encompasses more than value; it represents a range of resources crucial for influence and success in a specific industry (Bourdieu, 1986).

FTX's active involvement and impact in the cryptocurrency sphere significantly contribute to its capital. Bourdieu emphasizes the importance of systems and symbols in shaping power dynamics within society. Within this framework, FTX's participation in the space signifies its possession of capital, indicating that its knowledge, expertise, and contribution to the symbolic structures of the industry carry influence and prestige that shape power dynamics and recognition (Bourdieu, 1986).

The success and reputation of FTX are closely intertwined with its networks within the cryptocurrency community. Bourdieu’s theory highlights the significance of relationships and networks, underscoring how social capital profoundly affects an entity’s position and influence within society (Bourdieu, 1986).

FTX's strong connections, collaborations, and partnerships within the crypto community demonstrate the value of its capital. These contributions to the network enhance FTX's position and influence in the industry.

According to Bourdieu, symbolic capital is a source of power. FTX's prominent status and significant presence in the cryptocurrency world allow it to accumulate capital through its reputation, industry influence, and notable contributions. This symbolic capital reinforces FTX's ability to exert influence and shape perspectives within the crypto sphere. It highlights that reputation and recognition are factors contributing to FTX's power and impact in the industry's hierarchy. (Bourdieu, 1986)

The morphogenetic model provides insights that could potentially be related to FTX's path. This model focuses on how organizations adapt to both external factors, emphasizing the importance of adaptability in growth and development. FTX's ability to navigate challenges and quickly adapt to changing market dynamics strongly reflects the principles of this perspective. This alignment demonstrates FTX's willingness to embrace change, build resilience, and utilize flexibility as elements in its journey within the changing cryptocurrency industry. (Mutch, 2017)

FTX showcases its skills in a highly competitive and constantly changing industry through its wide range of capabilities, including regulatory navigation, token issuance, and the implementation of rewarding systems. Its ability to successfully navigate frameworks, innovate through creation, and develop intricate yet effective reward mechanisms all contribute to its prominent position and achievements in this dynamic market landscape.

FTX began establishing its resources at an early stage. They actively supported government regulations, which helped them earn the trust of both users and the government. A substantial amount of their funds was invested in building their reputation within the market, including ventures like FTX Arena. Through acquisitions, FTX positioned itself as the regulated cryptocurrency exchange, as highlighted in an exclusive report on how they strategically navigated regulatory landscapes (Prentice & Berwick, 2022; Reiff, 2023).

The report also mentions FTX's aspirations to operate as a hedge fund. In finance, a hedge fund typically manages an investment portfolio using strategies. FTX's ambitions in this realm indicate that they have dedicated resources towards establishing a financial platform (Oliver & Fletcher, 2022).

The CEO of FTX, Sam Bankman-Fried, played a role in the company’s trajectory. Notably, his arrest in the Bahamas became an event within this context (Powell, 2022).

FTX made a mistake in creating resources. They created their own cryptocurrency, FTT coin, and kept most of the volume with themselves, which significantly increased their asset value and helped them to attract more investments and loans. They used this money in trading with a sister company founded by Sam only. The use of their users' money in investments was a big risk. When their balance sheet got leaked and the world got to know about their digital assets volume, Binance, one of the investors in FTX, made an announcement of their decision to sell all of their FTT token holdings. The value of FTT dropped rapidly, and as their assets were mostly FTT coins, FTX lost their assets and experienced a bank run (Reiff, 2023; Hetler, 2023; Vidal-Tomas, 2023).

FTX faced a crash attributed to a lack of liquidity and mismanagement of funds, leading to a surge in withdrawals by concerned investors. The involvement of tokens like FTT contributed to the crisis and reflected the risk associated with such practices (Yousaf & Riaz, 2023).

FTX's series of decisions ultimately led to a collapse that had significant repercussions throughout the cryptocurrency industry in November 2022. This collapse resulted in the downfall of a player in the crypto exchange world, sending shockwaves across the industry and beyond. The chain of events that unfolded was primarily caused by issues such as mismanagement of funds, alleged misuse of customer deposits, and underlying governance discrepancies (Reiff, 2023; Vidal-Tomas, 2023).

As a result, investors keenly felt the impact of grappling with the aftermath of vanished client funds and perplexing movements of sums of money. This distressing situation highlighted the risks associated with governance structures and less than transparent financial practices commonly found within the cryptocurrency sphere (Yousaf & Riaz, 2023). The involvement of FTX's founder Sam Bankman-Fried amidst these circumstances only added complexity to the case. His association with fund movements became a point in legal disputes, intensifying the complexities surrounding this entire debacle and complicating resolution efforts by stakeholders and regulatory bodies.

References:

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2. Hetler, A. (2023, November 6). FTX scam explained: Everything you need to know. WhatIs.com. https://www.techtarget.com/whatis/feature/FTX-scam-explainedEverything-you-need-to-know

3. Yousaf, I., Riaz, Y., & Goodell, J. W. (2023, May 1). What do responses of financial markets to the collapse of FTX say about investor interest in cryptocurrencies? Eventstudy evidence. Finance Research Letters. https://doi.org/10.1016/j.frl.2023.103661

4. Vidal-Tomás, D., Briola, A., & Aste, T. (2023, September 1). FTX’s downfall and Binance’s consolidation: The fragility of centralised digital finance. Physica A: Statistical Mechanics and Its Applications. https://doi.org/10.1016/j.physa.2023.129044

5. Knauth, D. (2023, April 13). Bankrupt crypto exchange FTX has recovered $7.3 billion in assets. Reuters. https://www.reuters.com/technology/bankrupt-crypto-exchange-ftxhas-recovered-73-bln-assets-attorney-2023-04-12/

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9. Prentice, C., Berwick, A., & Lang, H. (2022, November 18). EXCLUSIVE How FTX bought its way to become the “most regulated” crypto exchange. Reuters. https://www.reuters.com/technology/exclusive-how-ftx-bought-its-way-become-mostregulated-crypto-exchange-2022-11-18/

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