FTX took less than a week to go from the world’s third-largest cryptocurrency exchange to bankruptcy. The embattled cryptocurrency exchange sought bankruptcy protection.

On Friday morning, FTX, the hedge fund Alameda Research, and dozens of other affiliated companies filed for bankruptcy in Delaware. FTX US, which was not expected to be part of any financial rescue, was also included in the company’s bankruptcy filing.

According to the company, CEO and founder Sam Bankman-Fried has resigned. Bankman-net Fried’s worth was recently estimated to be $23 billion, and he has been a major political donor to Democrats. According to Forbes and Bloomberg, which closely track the net worth of the world’s richest people, his net worth has vanished.

“I was shocked to see things unravel the way they did earlier this week,” Bankman-Fried wrote on Twitter.

The unravelling of FTX is causing ripple effects. Companies that backed FTX are already writing down their investments. Politicians and regulators are increasing their calls for stricter regulation of the cryptocurrency industry.

And the latest crisis has put downward pressure on bitcoin and other digital currency prices. According to CoinMarketCap.com, the total market value of all digital currencies fell by about $150 billion in the last week.

The failure of FTX extends beyond finance. The company also had major sports sponsorships, such as Formula One racing and a deal with Major League Baseball. Miami-Dade County decided to end its relationship with FTX on Friday, which means the venue where the Miami Heat play will no longer be known as FTX Arena.

Mercedes announced that FTX would be removed from its race cars this weekend.

Semafor, the high-profile news startup run by former BuzzFeed editor-in-chief and New York Times columnist Ben Smith, was also an early investor for FTX and Bankman-Fried, as well as his brother.

SEC Investigating FXT

Bankman-Fried also has other issues. According to a person familiar with the situation, the Department of Justice and the Securities and Exchange Commission are investigating FTX to determine whether any criminal activity or securities violations occurred. The person could not speak publicly about the investigations and spoke to The Associated Press on the condition of anonymity.

The inquiry is focused on the possibility that FTX used customer deposits to fund bets at Alameda Research. Brokers in traditional markets are expected to keep client funds separate from other company assets. Regulators have the authority to penalize violations. When MF Global intermingled client assets with its own bets roughly a decade ago, it effectively failed for a similar practice.

FTX listed more than 130 affiliated companies worldwide in its bankruptcy filing. The company estimated its assets to be worth $10 billion to $50 billion and its liabilities to be worth the same amount. The company named John Ray III as its new CEO, a long-time bankruptcy litigator best known for having to clean up the mess left by Enron’s demise.

The bankruptcy of FTX will undoubtedly be one of the most complicated bankruptcy cases in recent years. According to bankruptcy lawyers, the company listed more than 100,000 creditors in its filing, and because all of its customers are effectively creditors because they deposited their funds with FTX, determining who is owed what will take months.

Cryptocurrency Not Protected

Cryptocurrencies are not legally protected, and politicians on both sides have issued statements opposing any Lehman Brothers-style bailout for cryptocurrency investors.

“Unlike in a case where there is (security insurance in the case of a brokerage failure) or where the FDIC steps in with a bank failure, these customers are completely exposed,” said Daniel Besikof, a partner at Loeb & Loeb LLP, specializes in bankruptcy law.

After experiencing the cryptocurrency equivalent of a bank run, FTX agreed earlier this week to sell itself to larger rival Binance. Customers abandoned the exchange after becoming concerned about FTX’s capital.

The cryptocurrency community had hoped that Binance, the world’s largest cryptocurrency exchange, would be able to save FTX and its depositors. However, after reviewing FTX’s books, Binance concluded that the smaller exchange’s problems were too large to solve and backed out of the deal.

FTX is the latest in a string of disasters rocking the crypto industry, which is now under intense pressure from collapsing prices and circling financial regulators. Its failure is already being felt across the cryptocurrency universe.

Sequoia Capital, a venture capital firm, announced Thursday that it is writing down its total investment in FTX of nearly $215 million.

Bitcoin price drop

BlockFi, a cryptocurrency lender, announced late Thursday on Twitter that it is “unable to conduct business as usual” and has paused client withdrawals due to FTX’s demise.

BlockFi, bailed out by Bankman-FTX Fried’s early last summer, said it was “shocked and dismayed” by the news about FTX and Alameda in a letter posted late Thursday on its Twitter profile.

The company concluded by stating that future updates on its status “will be less frequent than what our clients and other stakeholders are accustomed to.”

Bitcoin fell immediately after the letter was published and is now trading below $17,000. Bitcoin, the original cryptocurrency, had been hovering around $20,000 for months before FTX’s problems were revealed this week, sending it briefly down to around $15,500.

Shares of Coinbase, a publicly traded cryptocurrency exchange, and Robinhood, an online trading platform, rose nearly 12%.

Meanwhile, institutional investors were already turning against cryptocurrencies before this week. Sam Bankman-FTX.com Fried’s abrupt demise may have permanently harmed their chances of inclusion in mainstream portfolios.

While there are still many industry zealots, many professional money managers believe the case for cryptocurrency as a portfolio diversifier or digital gold has been debunked. They claim that the losses are too great and the market structure is too risky.

“It has become clear that it will not find a home in institutional asset allocation,” Hani Redha, multi-asset portfolio manager at Pinebridge Investments in London, said. “There was a time when it was regarded as a potential asset class that every investor should include in their strategic asset allocation, and that is no longer the case.”

Tiger Global and SoftBank are facing new FTX losses.

The recent explosions and scandals have demolished the key arguments of crypto supporters, effectively erasing the notion of Bitcoin as a safe haven in turbulent times. But none of those events, from the TerraUSD collapse to the Celsius bankruptcy, were as damning as the discovery that even FTX, once considered one of the most reliable names in crypto, was insolvent.

Salman Ahmed, the chief investment strategist at Fidelity International, which manages $646 billion from London, said the FTX collapse is “raising questions about the viability of the crypto ecosystem.” “It was always difficult to make a case for including crypto, but the setup has come under increased scrutiny.”

In February, his firm launched a Bitcoin exchange-traded product aimed at professional European investors. Since its inception, it has lost approximately 55% of its value.

Only a year ago, cryptomania was at its peak, with Bitcoin reaching $67,000. Bridgewater estimated in January that institutional investors owned 5% of Bitcoin.

Back then, frothy predictions were everywhere. JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou wrote that Bitcoin could theoretically reach $146,000 in the long run by crowding out gold. According to a PWC survey conducted in April, 42% of crypto hedge funds expect Bitcoin to trade between $75,000 and $100,000 by the end of 2022.

Investors’ perspectives are becoming more restrained. In a recent report, Panigirtzoglou predicted that Bitcoin would return to its summer lows of $13,000. On Friday, Bitcoin was trading below $17,000.

“The argument for investing in cryptocurrency for diversification died a long time ago,” he said in an interview.

Bitcoin has previously crashed and recovered. Some believers believe market hubris is being flushed out, putting the industry on a path to maturity. According to Mike Cyprys, an analyst at Morgan Stanley, FTX’s problems may benefit established companies with a track record of risk management, such as the Nasdaq Stock Market and CBOE Global Markets Inc.

According to Mark Dowding, chief investment officer at BlueBay Asset Management, the case for Bitcoin becoming a digital gold version is bogus. He believes it’s only time before more investors flee and crypto prices plummet.

“It should have been obvious that an industry that was producing nothing, burning cash, and promising alluring returns was doomed to fail,” he said.

VOR News, Bloomberg, AP