The FTX Collapse and Crypto Contagion

FTX was a crypto exchange where customers deposited dollars and crypto to trade, and Alameda Research was a separate trading firm, also founded by Sam Bankman-Fried, that traded on FTX and other venues. On paper the two were distinct businesses. In practice, according to evidence at Bankman-Fried's 2023 fraud trial, FTX had quietly given Alameda a effectively unlimited line of credit funded by customer deposits sitting on the exchange — meaning money customers thought was held for their own trading was, in large part, being lent out to Alameda to cover its own trading losses and investments.

The trigger

In November 2022, the crypto news outlet CoinDesk published a leaked balance sheet showing that a huge share of Alameda's assets consisted of FTT, a token issued by FTX itself, rather than cash or other independent assets — meaning Alameda's apparent net worth was largely backed by a token whose value FTX itself controlled. Binance, a rival exchange and early FTX investor, announced it would sell its own FTT holdings, and the resulting price drop in FTT raised the alarm that Alameda's balance sheet was far weaker than assumed. Customers rushed to withdraw funds from FTX; the exchange could not meet the withdrawals because, as it turned out, a large share of "customer" money had already been spent, lent out, or invested elsewhere by Alameda. FTX filed for bankruptcy within about a week of the CoinDesk report — a collapse that, at its size, moved faster than nearly any prior financial failure.

The contagion

Because FTX and Alameda were large counterparties and lenders across the crypto industry, several other firms that held assets on FTX, had loans outstanding to Alameda, or depended on FTX for liquidity failed or were badly damaged in the following months — a chain reaction that compounded losses already spreading through the industry after The Terra-Luna Collapse earlier that year.