4 Factors Behind the FTX Collapse — and How it Might Affect You (Even if You Didn’t Use FTX)

If you've had one eye on the news in the past couple of months, it will have been impossible to ignore the scandal surrounding the much-vaunted crypto exchange FTX.

From the dizzying highs to the embarrassing lows of bankruptcy, the story of FTX is a cautionary one, and has had far-reaching ramifications.

So what caused its collapse, and what does this mean for average crypto holders, regardless of whether or not it was your exchange of choice?

The basis for the fall from grace

While the details of the inner workings and management of FTX and its various subsidiaries, offshoots and associated organizations are still being unpicked, there are a few main issues with the way it operated that ultimately led to its demise:

Liquidity

Like many failed financial institutions before it, FTX had a liquidity issue. This meant that it couldn't access cash to back up any of its liabilities and obligations to its users, putting its entire exchange on fragile foundations.

Fund mismanagement

Worse still, capital that people pumped into FTX was siphoned into other projects, breaching the exchange's own terms, and eroding trust in the platform when this came to light.

User abandonment

When murmurings of FTX's perilous position began, users started to pull their assets out of the exchange, with $5 billion withdrawn in one 24 hour period. This in turn resulted in its native coin, FTT, dropping sharply in value, perpetuating the escalation of the crisis.

Bankruptcy & cyber attacks

By the 11th of November, FTX and its subsidiaries voluntarily filed for bankruptcy, and yet this was not the end of the story, as after this hackers stole hundreds of millions in assets from the crippled exchange, further compounding its calamitous situation.

The knock-on impact

There are a few things to talk about regarding the aftermath of FTX's implosion, but let's start with the silver linings:

Getting the most from cryptocurrencies and exchanges

This has been a wakeup call for crypto investors, and a sign that the movement has some growing up to do.

Using crypto referral codes to build a portfolio with a reputable, stable exchange now seems the best way forward. The rapid ascent of FTX should have rung alarm bells, and so now investors will be more cautious about untested upstarts, instead focusing on established exchanges with a strong track record of serving their users effectively and transparently.

FTX customers are in limbo

We are a long way from the bankruptcy proceedings surrounding FTX being wrapped up, and while those at the helm of the crippled exchange today are making all the right noises, it's important for customers to be realistic about their prospects of recouping any assets they had stored with the company when it collapsed.

Patience is going to be necessary, and there may be further action taken against the exchange and its founders in the future.

Market volatility continues

Investors at all levels were spooked by the news of FTX's cataclysmic situation, and this only compounded the falling confidence in the crypto market that had built over the course of 2022.

Major players including Bitcoin and Ethereum were hit hard, with values tumbling significantly in a tight timeframe, and staying low for several weeks. A period of recovery now seems to be underway, but there's still a lot of hesitance around the market at the moment.

Investors must wise up

Regardless of where you stand, the FTX furore is a sign that anyone who buys crypto needs to know the risks involved, research the exchanges they use thoroughly, and also have a plan to deal with problems like this in the future.

It may mean that more people now store their assets in a crypto wallet over which they have sole control, rather than trusting any third parties with this responsibility.

Final thoughts

Perhaps the most significant change that will come about because of FTX's collapse is a tightening of regulations covering the crypto market, not just in the US but worldwide.

This should be a good thing for customers in the long run, even if it does go against the decentralized and unregulated ethos on which the crypto scene was founded.