FTX’s $8 Billion Black Hole

How a crypto darling unraveled in a single week and reset the conversation about digital-asset risk

Author

Business Knowledge
July 19, 2025

Hey there

In mid-2022, the Bahamas-based exchange FTX processed roughly ten billion dollars of daily crypto trades and promoted itself as the “safest and easiest” on-ramp for digital assets. By 11 November, the company had filed for Chapter 11 protection, wiping out an estimated eight billion dollars in customer deposits and vaporizing a market valuation once pegged at thirty-two billion dollars. This edition breaks down the rapid rise, the fatal entanglement with sister hedge fund Alameda Research, and the lessons any business leader can draw from one of the fastest corporate implosions on record.

In this edition of Business Knowledge

  • Executive Summary

  • Background: From Quant Floor to Crypto Fame

  • The Business Challenge: Hypergrowth, Leverage and Loose Controls

  • The Strategic Missteps: Related-Party Risk, Token Illusion, Governance Void

  • Execution: One-Week Death Spiral

  • Results and Impact: Legal Fallout, Industry Shakeout, Policy Shift

  • Lessons for Business Leaders

  • References

Executive Summary

Founded in 2019 by former Jane Street trader Sam Bankman-Fried, FTX grew on high-frequency trading infrastructure, deep US venture funding and clever brand marketing that put its logo on arenas and Super Bowl ads. Yet behind the slick interface, customer deposits flowed through a hidden backdoor to Alameda Research for margin trades. When a leaked balance sheet showed Alameda held billions in illiquid FTX-issued FTT tokens, rival exchange Binance tweeted plans to sell its FTT position, sparking a week-long liquidity run. FTX halted withdrawals on 8 November, sought emergency rescue from Binance on 9 November, and entered bankruptcy on 11 November 2022. Court filings later alleged “complete failure of corporate controls” with no board committees, no accurate cash ledger and unsecured private keys.

Background: From Quant Floor to Crypto Fame

Sam Bankman-Fried left Jane Street Capital in 2017, launched Alameda Research to arbitrage bitcoin price gaps across Asian exchanges, and used the profits to seed a customer-centric derivatives venue. FTX attracted liquidity by offering up to 20-times leverage on perpetual futures, giving pro traders fee rebates and shipping products faster than established rivals. Blue-chip investors such as Sequoia Capital, SoftBank and the Ontario Teachers’ Pension Plan pumped two billion dollars into four funding rounds, valuing FTX at thirty-two billion dollars by January 2022. The company opened a regulated US arm, hired celebrities for advertisements, and lobbied Washington for a light-touch framework that would bless its novel clearing model.

The Business Challenge: Hypergrowth, Leverage and Loose Controls

1. Explosive Volume Versus Compliance Depth

FTX built a derivatives engine that processed hundreds of thousands of orders per second, but compliance, treasury and audit teams remained thin. The firm relied on Slack polls for approval of key controls and used QuickBooks, not enterprise software, for bookkeeping.

2. Cross-Entity Liquidity

Customer funds resided in omnibus accounts that co-mingled exchange balances with Alameda’s trading collateral, violating the segregated-asset norm expected of broker-dealers.

3. Native Token Dependence

FTT token, created by FTX, served as collateral for loans and attracted yield seekers with buy-back burns. The token’s market cap depended on faith in FTX’s solvency, creating reflexive risk.

4. Margin Culture

Up to 20× leverage enticed volume but amplified liquidation cascades when prices swung. Combined with Alameda’s big directional bets, the system was primed for a bank-run scenario.

5. Regulatory Arbitrage

Incorporation in the Bahamas let FTX skirt stricter US custody rules, but it also denied the exchange a backstop like SIPC insurance or Federal Reserve liquidity in crisis.

The Strategic Missteps: Related-Party Risk, Token Illusion, Governance Void

1. Secret Alameda Exemption

Internal code granted Alameda a negative-balance exemption, allowing the hedge fund to run massive margin deficits while ordinary users faced auto-liquidation. This policy hid true exposure until liquidity dried up.

2. Collateral Reliance on FTT

Loans to Alameda were collateralized largely by FTT, a token printed by FTX itself. When Binance announced plans to dump FTT, the token price sank 80 percent in forty-eight hours, nuking collateral value.

3. Board Without Adults

FTX’s nominal board had three directors: Sam Bankman-Fried, another FTX executive and an outside attorney. No audit committee or risk chair oversaw billions in customer liabilities.

4. Auditor Shopping

FTX US and FTX International used different audit firms, one of which touted experience in the metaverse rather than top-tier financial statements. The fragmented audit trail missed internal transfers.

5. Speed Over Segregation

The company prioritized product releases—like tokenized equities and prediction markets—over building reconciliations that would have flagged missing deposits in real time.

Execution: One-Week Death Spiral

2 November: Crypto news site CoinDesk publishes leaked Alameda balance sheet showing $5.8 billion worth of FTT tokens on its books.

6 November: Binance CEO Changpeng Zhao tweets intention to sell $530 million in FTT “due to recent revelations.” Withdrawal requests on FTX spike above $6 billion in twenty-four hours.

8 November: FTX halts withdrawals, confirms a liquidity crunch. Alameda trading halts.

9 November: Binance signs a non-binding letter of intent to acquire FTX but walks away within twenty-four hours after reviewing books.

10 November: Bahamas Securities Commission freezes FTX Digital Markets’ assets.

11 November: FTX, FTX US and Alameda Research file for Chapter 11; Sam Bankman-Fried resigns as CEO. Former Enron liquidator John J. Ray III takes over, stating he has never seen “such a complete failure of corporate controls.”

Results and Impact: Legal Fallout, Industry Shakeout, Policy Shift

1. Customer Hole

Ray’s first-day declaration listed an $8 billion shortfall in customer assets and over one million creditors, making FTX the largest crypto bankruptcy to date.

2. Criminal Charges

US prosecutors charged Bankman-Fried with wire fraud, commodities fraud and money-laundering conspiracy. Several executives pleaded guilty and agreed to cooperate.

3. Venture Capital Write-offs

Sequoia marked its $210 million stake to zero. Ontario Teachers wrote off $95 million, prompting political scrutiny of pension exposure to risk assets.

4. Market Contagion

Crypto lender BlockFi, which had credit lines backed by FTX equity, filed for bankruptcy. Bitcoin briefly fell below $16 000, a two-year low.

5. Policy Acceleration

US Senate re-drafted the Digital Commodities Consumer Protection Act to tighten exchange custody rules. EU lawmakers fast-tracked the MiCA framework, mandating proof-of-reserves attestation.

Lessons for Business Leaders

1. Segregate Client Money, Always

Commingling customer deposits with proprietary trading is a red line that no growth target justifies. Structures protecting client assets are the first, not final, item in every roadmap.

Strong walls between house funds and user balances prevent liquidity spirals when confidence turns.

2. Governance Scales with Valuation

A thirty-billion-dollar firm run without a formal board committee invites collapse. Independent directors and real audits cost less than one week of crisis.

Outside oversight forces uncomfortable questions early, avoiding existential surprises later.

3. In-House Tokens Are Not Capital

Printing a token does not equal raising cash. If collateral value depends on your own solvency, the feedback loop can unwind overnight.

Balanced collateral that trades on independent venues offers a sturdier defense against panic.

4. Transparency Beats Narrative

FTX built credibility through marketing but ignored plain-language balance-sheet disclosure. When truth emerged, trust evaporated in hours.

Open books and third-party attestations build reservoirs of confidence long before rumors start.

5. Speed Matters—But Only with Controls

Shipping features fast can win market share, yet core risk checks must scale in parallel. Growth that outpaces controls sets a timer on disaster.

A culture that pairs innovation sprints with rigorous reconciliation delivers durable advantage, not fragile hype.