What Happened To FTX? The Crypto Crash, Explained

FTX, SBF, EA, CZ--if these letters mean something to you or a loved one, you may be entitled to financial compensation.

But if you were an investor in FTX, the cryptocurrency trading platform run by EA proponent SBF and wrecked by a tweet from CZ, you probably will not get that financial compensation.

The latest crypto crash meltdown has flooded all feeds with hot takes, chaotic happenings and deeply confusing graphs. But for all that remains unclear about the situation, one thing is sure: memes are an important part of the story.

What Was FTX?

FTX was a website where you could buy, sell, and hold cryptocurrency. On the user end, it was sort of like a Robinhood for crypto, but structurally it worked more like a big bank.

Just like how big banks like J.P. Morgan Chase or Deutsche enable people to move around and deposit real money, FTX allowed people to move and deposit cryptocurrency. It provided the infrastructure so that people who didn’t understand the blockchain (which is, if we’re being honest with ourselves, almost everybody) could invest.

FTX wasn’t the only cryptocurrency exchange: the biggest one, and FTX’s biggest competitor, is Binance. The owner and founder of Binance is named Changpeng Zhao, but people call him CZ.

Who is SBF?

SBF is Sam Bankman-Fried, the 30-year-old founder and owner of FTX. He went to MIT and worked on Wall Street for a while before pivoting to crypto. He founded FTX in 2019, and by 2022 was worth over $16 billion dollars.

He used his newfound wealth to become the second-biggest donor to the Biden campaign and give to a wide variety of charitable causes. SBF is very interested in Effective Altruism (called EA), which is a philosophy that asks people to get rich so they can donate their money and help the world. The idea is that by playing the game, you can get wealthy and then change the game. Critics of EA say that it is an excuse for tech bros with savior complexes to do really bad things.

What Did SBF Do?

SBF ran other companies in addition to FTX. One of these was called Alameda Research, and it worked like a hedge fund. FTX ran the platform where crypto was traded, while Alameda Research did trading and made investments on the platform.

Allegedly, SBF ran a scam: he would print FTT, a cryptocurrency used on FTX, and give it to Alameda. FTT had a high price because a lot of people were trading with it on the FTX platform, so Alameda could use it as collateral to take out loans of real money or other cryptocurrencies. If this is true, then SBF figured out how to turn imaginary money into real money.

But to keep the money printer going, Alameda would supposedly then invest this real money back into the FTX exchange. Any losses that Alameda took didn’t matter, because SBF could just keep filling the hole by giving Alameda more FTT. And, Alameda’s investments would boost the value of the FTX exchange.

The scheme would be able to run so profitably in part because venture capital firms also kept pumping real money into FTX and Alameda. SBF could easily use his influence and his overall vibe of “genius tech founder” to get people to keep pouring money into the scheme.

How Did People Find Out?

Binance and FTX were rivals for a long time. Binance CEO CZ held a large amount of FTT cryptocurrency, but then a report came out on CoinDesk, the Wall Street Journal of the cryptocurrency world. The report shared that Alameda held more than half of all FTT, which made CZ suspect that SBF might be running a scam.

So CZ sold his FTT and announced it via a tweet. Other people got spooked, and started selling their FTT and trying to get their money out of the FTX exchange. Within 24 hours of the CZ tweet, FTX had no actual money on hand to pay anybody back. Part of this was because the company had no real money other than what people had loaned it, and now everybody was asking for the money back.

What Happened Next?

Binance thought about bailing out FTX and saving the exchange, but decided against it after a day. SBF apologized and claimed he would return everybody’s money. But the next day, he filed both FTX and Alameda for bankruptcy. Pretty much every cryptocurrency plummeted in value as a result.

Who is Caroline Ellison? What Was Happening in the Bahamas?

Caroline Ellison was the CEO of Alameda Research, and lived with SBF and eight others in a mansion in the Bahamas. Apparently, all ten of the people not only worked for FTX, but were involved in complicated polyamorous relationships. The discovery of Caroline's Tumblr, worldoptimization, shed some light on the mindset inside FTX and Alameda:

Rumors of excessive drug use and strange behavior have also been tied to this group.

What Does This Mean For Cryptocurrency?

Many think this latest scam shows cryptocurrency is dead, at least for now. It’s difficult to trust people in the industry after one of the most visible companies ends up being a Ponzi scheme.

Currently, cryptocurrency is mostly traded the way stonks are traded, but on totally unregulated exchanges. A cryptocurrency has no value other than what the market assigns to it, which is determined by how much people want it. At the moment, because cryptocurrency isn’t widely accepted, the primary reason people buy cryptocurrency is to hold it and see it go up so they can turn it back into actual money and turn a profit.

But actual money isn’t real either: it has no value other than what the market assigns to it and a government guarantees. The dream of cryptocurrency is to replace that centralized government with a decentralized computer network, and have the decentralized computers (the blockchain) perform the functions of regulation which the government usually performs.

Only time will tell if that dream is dead, but it certainly seems as if the era of treating cryptocurrency like a new kind of stock with no regulation to it is over.

Why Are We Talking About This On Know Your Meme?

Well…. memes are an important part of the crypto world because they're how the crypto bros communicate. Posting in general is an even more important part: this whole thing started with a tweet from CZ, and moved so quickly in part because it all took place online.

In a sense, cryptocurrency is to real money what meme culture is to IRL culture. Memes and crypto both operate by the logics of online exchange. They aren't controlled from a central point such as a studio, bank or government the way movies and money are; they are radically decentralized. But this doesn't mean the meme and crypto worlds are unstructured: platforms like Twitter or TikTok serve the same role that cryptocurrency exchanges like FTX or Binance do. They try and centralize what is naturally decentralized, simultaneously offering access to more people while also controlling that access.

As we watch the collapse of FTX and the Elon Musk chaos over at Twitter, we are reminded of how delicate these platforms and exchanges are. We just don't yet know how to deal with the way information (be it money which is one kind of information, or culture which is another) moves online.

In the extended metaphor in which memes are crypto and Twitter is FTX, the website you are on now is either CoinDesk or the SEC.