FTX was once hailed as the gold standard of cryptocurrency exchanges. Founded in 2019 by Sam Bankman-Fried, the exchange quickly rose to prominence, branding itself as a sophisticated and trustworthy trading platform. With high-profile endorsements, deep liquidity, and a well-crafted public image, FTX seemed poised to become the backbone of the crypto economy. But behind the scenes, a tangled web of deception was brewing—one that would ultimately bring the entire empire crashing down.

The Meteoric Rise

FTX’s early success was fueled by aggressive marketing, strategic acquisitions, and a well-funded war chest. Bankman-Fried, a former quantitative trader, became the face of the company, frequently appearing in media interviews and rubbing shoulders with politicians, regulators, and celebrities. FTX secured major sponsorship deals, including the naming rights to the Miami Heat’s arena and partnerships with sports leagues. The exchange was positioned as a leader in the space, offering innovative trading products and deep liquidity that attracted retail and institutional investors alike.

At its peak, FTX was valued at $32 billion. Investors, including Sequoia Capital, SoftBank, and even major pension funds, poured billions into the exchange. “FTX is the safest, most trusted brand in crypto,” a Sequoia executive wrote in a now-infamous internal memo. Bankman-Fried was even compared to legendary investors like Warren Buffett and J.P. Morgan by some in the financial press.

The Cracks Begin to Show

Despite its public image, FTX’s foundation was built on a precarious relationship with Alameda Research, a crypto trading firm also founded by Bankman-Fried. Alameda had deep ties to FTX, using customer funds from the exchange to make risky investments. This conflict of interest remained hidden for years, but rumors of mismanagement began circulating in mid-2022.

Then, in November 2022, a leaked balance sheet from Alameda revealed the shocking extent of the problem: the firm’s holdings were largely comprised of FTX’s native token, FTT. The revelation sent shockwaves through the industry, as it exposed the illiquid and overleveraged nature of both Alameda and FTX’s financials. The market reacted swiftly, with Binance CEO Changpeng Zhao announcing that his company would liquidate its FTT holdings, triggering a death spiral.

A Coindesk article from November 2, 2022, titled “Divided Empire: How Sam Bankman-Fried’s FTX and Alameda Research Became One” detailed the murky ties between the two firms. This investigation accelerated the panic, as traders and investors realized the extent of the entanglement. Read more here.

The Collapse

As customers rushed to withdraw funds from FTX, it became clear that the exchange did not have enough liquidity to cover the demand. Within days, withdrawals were halted, and FTX filed for bankruptcy on November 11, 2022. The fallout was massive—an estimated $8 billion in customer funds were missing.

A Bloomberg report from November 10, 2022, described the situation as “the biggest financial collapse since Lehman Brothers,” highlighting the systemic shock it sent through both traditional finance and the crypto industry. Read the Bloomberg report here.

John Ray III, the lawyer brought in to oversee FTX’s bankruptcy (the same man who handled the Enron liquidation), later testified before Congress, stating, “In my 40 years of legal and restructuring experience, I have never seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

The collapse not only wiped out investors but also shook confidence in the entire cryptocurrency market. FTX’s downfall was not a simple business failure; it was a result of outright fraud, mismanagement, and deceit. U.S. authorities soon launched investigations, leading to the arrest of Sam Bankman-Fried and several top executives.

The Aftermath and Lessons Learned

Bankman-Fried was later convicted on multiple charges of fraud and conspiracy, marking one of the most high-profile financial crimes in recent history. The FTX bankruptcy proceedings have been slow and complex, with efforts to return funds to creditors now finally underway.

The Wall Street Journal published an in-depth analysis on December 15, 2022, titled “FTX: The House of Cards That Fell Overnight”, detailing how regulatory agencies missed multiple red flags along the way. “This wasn’t just a crypto failure—it was a corporate governance failure on every level,” said John Coffee, a professor at Columbia Law School, in the article. Read the WSJ analysis here.

The FTX scandal underscored the dangers of trusting centralized entities in an industry built on the principles of decentralization. While some claim this marked a setback for crypto, the reality is that Bitcoin—the only truly decentralized, trustless financial network—remained unscathed. The lesson is clear: self-custody and decentralization are the only paths to true financial sovereignty.

For an analysis of how FTX’s collapse compares to the Mt. Gox disaster, read [this article].