Even if you don’t care much about cryptocurrencies, you have most likely heard about what has happened in the last few days. The token of the FTX exchange, FTT, has dropped from above $25 to $2.5 in a couple of days. What has caused this to happen?
This will not be a long article, but I will try to explain what has happened to the FTX exchange in a very simple way. There is a lot to learn from the mistakes that have taken place, and if you read this article, it will be easier to explain to your friends and family members what has taken place in the crypto world in the last few days.
What happened to FTX?
A cryptocurrency exchange should have a guarantee that the funds you keep on the exchange are safe. What does this mean? The cryptocurrency should own enough funds on its own so that every single token and value on the exchange can be withdrawn at the same time, without making the exchange run dry.
This might sound tough, and it is important to know that no bank in the world could show up something like this. If everyone went to withdraw money from the bank, you would quickly realize that the bank doesn’t have all their money. That is why mass withdrawals can cause giant trouble as people become afraid and try to withdraw their funds from a normal bank.
What does this have to do with the FTX exchange?
FTX had a lot of funds in reserve to cover the funds of its users. But, the true problem was that most of the reserves were in their own token, FTT. This was discovered last week by CoinDesk. Even though the Dollar value of the FTT token was high enough to be a reserve, they would never have been able to sell all those tokens at such a price, meaning that the actual value was much lower.
Why? The demand for the FTT token wasn’t and isn’t high enough. When the market started to understand this, fear hit the FTX users. Sam Bankman-Fried, the well-known and highly respected leader of FTX, understood that problems were approaching. He, therefore, contacted Binance (the largest of all exchanges) and asked whether they wanted to buy FTX or not. At first, Binance was open to the idea, but then they later laid those plans on ice.
At the same time, Binance announced that they would get rid of their FTT tokens. This caused further panic concerning the FTT token price.
These are the basics of what’s happening with the FTX exchange. In less than a week, the price of the FTT token has dropped from $25 to $2.5. This also means that the reserves that were to protect the assets of the FTX users are no longer even close to protecting the values of the users. This has caused further panic.
Why have all other cryptocurrency prices dropped as well?
There is a general panic atmosphere in the market, causing the general cryptocurrency owner to panic sell. Many people also believe that FTX has started to sell many tokens in their possession, such as SOL, AVAX, ETH, and BTC, in order to get their hands on solid currencies.
When will this stop? It is hard to predict, but most likely, the panic will slowly stop, and whales will start to buy once again.