FTX, once the second-largest cryptocurrency exchange in the world, is worthless, according to one of the company’s early investors.
In a note to partners, venture capital firm Sequoia said it had written off its $150m (£130m) investment in FTX.
“In recent days, a liquidity crisis has created a solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are reducing our investment to $0,” the investors wrote in a post signed Team Sequoia.
Other investors have lost similar sums, including the Ontario Teachers’ Pension Plan, which invested about $400 million in the stock market last year, valuing FTX at $25 billion.
The cryptocurrency market came under pressure after the FTX crisis, with the core digital asset, bitcoin, falling 7.6% in the past 24 hours to $16,775 and the second largest, Ethereum , falling 4.4% to $1,205.
If you own a crypto-asset, you control a secret digital key that you can use to prove to anyone on the network that a certain amount of that asset is yours. If you spend it, you’re telling the entire network that you’ve transferred ownership and using the same key to prove you’re telling the truth. Over time, the history of all these transactions becomes a durable record of who owns what: this record is called the blockchain.
Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its inception in 2009, at times rising in value as investors piled into it – and crashing recently .
Skeptics warn that the lack of central control makes crypto-assets ideal for criminals and terrorists, while libertarian monetarists like the idea of currency without inflation and without a central bank.
The whole concept of cryptocurrencies has been criticized for its ecological impact, with the “mining” of new coins requiring vast energy reserves and the associated carbon footprint of the entire system.
Richard Partington and Martin Belam
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Questions and answers
What is Cryptocurrency?
Spectacle
Cryptocurrencies are an alternative way to make cash or credit card payments. The underlying technology allows “money” to be sent directly to others without having to go through the banking system. For this reason, they are beyond the control of governments and are not regulated by financial watchdogs – and transactions can be conducted in a way that reasonably keeps you pseudonymous.
If you own a crypto-asset, you control a secret digital key that you can use to prove to anyone on the network that a certain amount of that asset is yours. If you spend it, you’re telling the entire network that you’ve transferred ownership and using the same key to prove you’re telling the truth. Over time, the history of all these transactions becomes a durable record of who owns what: this record is called the blockchain.
Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its inception in 2009, at times rising in value as investors piled into it – and crashing recently .
Skeptics warn that the lack of central control makes crypto-assets ideal for criminals and terrorists, while libertarian monetarists like the idea of currency without inflation and without a central bank.
The whole concept of cryptocurrencies has been criticized for its ecological impact, with the “mining” of new coins requiring vast energy reserves and the associated carbon footprint of the entire system.
Richard Partington and Martin Belam
The bank-style “cash crunch,” fueled by a rush in FTX withdrawals, led to a pause in all cash outflows on Tuesday morning. But for the crisis to become a solvency risk, it would mean that the company had invested customer deposits in illiquid assets, forcing it to choose between a precipitous sale at depressed valuations or a complete halt to withdrawals.
In messages sent shortly before FTX plunged into crisis, its owner, Sam Bankman-Fried, insisted that was not the case. “FTX is doing well. Assets are good. FTX has enough to cover all client holdings,” he said in tweets that he has since deleted. “We don’t invest client assets ( even in treasury bills).”
Since then, Bankman-Fried has changed its message, telling investors that the company needs $8 billion to cover withdrawal requests, according to multiple reports.
The sudden crash in value was prompted by leaked documents that implied that Alameda Research, a hedge fund with close ties to FTX through its common owner, Bankman-Fried, was in fact insolvent.
The Alameda accounts were based on a token, FTT, which was issued by FTX and had no value other than that guaranteed by the exchange, according to the documents.
This revelation turned into a crisis when Binance, the largest cryptocurrency exchange, announced that it would sell its own major stake in FTT. The ensuing fire sell dropped the token’s value well below the $22 floor that FTX had pledged to support, and caused the equivalent of a bank run at FTX itself, as customers were rushing to withdraw their deposits faster than the exchange could process them.
The fight between the two exchanges briefly turned into an alliance, as Binance agreed to make a non-binding offer to bail out FTX and merge with it. But on Wednesday night, the deal fell through.
“As a result of the company’s due diligence, as well as the latest news reports regarding mismanaged client funds and alleged investigations by U.S. agencies, we have decided not to pursue the potential acquisition of FTX.com,” Binance said.
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