What is FTX and why did its crash have a domino effect in the cryptocurrency market?

What was FTX?

Omar Azañedo Sayan, CEO of Noncash (Peruvian virtual exchange house that started operations in 2019) told Trade that FTXlike for example Binance, are exchange houses of cryptocurrencies. In other words, its purpose was and is to offer its clients a space to exchange digital currencies for other digital currencies or for traditional money and vice versa. “They are not or is a fund”, projection.

FTX It was considered one of the four most important exchange either exchange houses of the sector of cryptocurrencies for having come to be valued at US$ 32,000 million and had its own token (own digital currency) called FTT.

In the specific case of FTXis wallet was characterized as a ‘exchange‘ centralized, unlike, for example, others known in Peru such as Buenbit and Buda.com.

According to the Bitcoin Journal, a ‘exchange‘ Centralized Exchange (CCE) are exchange platforms that function like traditional stockbrokers or stock markets. These CCEs are owned by the company that does the trading and maintains full control of the transactions. In other words, users do not have access or private keys to make movements in the portfolios that are part of their accounts, thus placing all their trust in the operators of the ‘exchange‘ that, in theory, they should only transact through mechanisms provided and approved by the company’s central authority.

“The problem has been that movements and investments have been made apparently without the knowledge of its users,” explained to El Comercio Carlos Bernos, Buda.com’s country manager for Peru.

Bankruptcy

A statement published by FTX On Friday, November 11, it made public the bankruptcy declaration of this exchange house, which they considered to be the appropriate measure to be able to manage the company’s assets and to be able to protect the interests of its shareholders, reported Agencia EFE.

According to what was published by The New York Times, the fall of FTX occurred after on November 2 CoinDesk, a publication specialized in cryptocurrencies, reported that there was a leaked document showing that Alameda Research, a hedge fund operated by Sam Bankman-Friedfounder and former CEO of FTXpossessed an unusual amount of tokens FTT. The news hinted that, despite being independent printers, they would have close financial ties.

Due to these irregularities, Binancethe other giant in crypto wallets and its main competitor, announced that due to these revelations it had decided to sell its assets in FTT (token of FTX), which caused the value of the FTT collapsed and other operators decided to abandon FTX in order to protect your money.

This unleashed that in three days the requests for withdrawal of money in FTX amounted to around US$ 600 million, revealing that FTX it had liquidity problems, that is, it did not have the money at that time to take care of the return of its users’ money.

At that time, Binance reappeared stating that they had reached an agreement with FTX and that they would buy it to be able to rescue it, although Changpeng Zhao, owner of Binance, made it clear that they had the power to withdraw from the agreement at any time and so it was. According to Binanceafter completing an audit and due to regulatory investigations and reports of mismanagement of funds in custody (user money), they had decided not to continue with what was agreed.

Impact on the crypto world

According to Carlos Bernos, Buda.com’s country manager for Peru. and the economist Omar Azañedo Sayan, CEO of Noncash, the fall of FTX generated a domino fall in the market of cryptocurrencies based on the panic after selling the positions in FTT of Binance and rumors of insolvency FTX. This situation worsened when FTX announced that it was limiting withdrawals in cryptocurrencies.

The loss of confidence caused by this decision caused the price of FTT fell from $25 to $2.7 the next three days after filing for bankruptcy, that is, it plummeted by 90%. coins like Bitcoin returned to lows of two years ago below US$20,000, ethereum registered a fall of more than 3% and other digital currencies closed in the red with falls of almost 5%, one of them Binance Coin.

The impact on the crypto market was so strong that digital wallets such as Buenbit spoke to their users to give them peace of mind and inform them that through the Proof Of Funds (document that demonstrates the origin of financial resources) those who had their money in the ‘exchange’ They could verify the funds in custody and available in different cryptoactive wallets.

What should users do from now on?

Bernos comments that it is necessary for users of cryptocurrencies understand the issue of custody of funds in cryptocurrencies because there is more than one way.

The best known and most common is through a digital wallet. But, those who wish to place their funds in a ‘exchangeThey should find out about how the custody system is set up, who are the people behind the company and what is the history of the company, as well as in which countries it has operated, what adversities it has had and how it has overcome them, advises Bernos.

There are also two other options for the custody of the funds in cryptocurrencies. The first is through a ‘software wallet’ that can be downloaded by the owner of cryptocurrencies to a cell phone or electronic device where they can move their funds.

The second is a ‘hardware wallet’, a device that resembles a USB that must be connected to the computer and, through a ‘software’ that works with a private key of 12 or 14 words that must not be shared, the owner of the cryptocurrencies You can store your own crypto outside of the Internet. Bernos comments that although this is not the most practical way to keep cryptocurrencies If you do daily transactions, it is the safest.