Rajat Soni, CFA
Rajat Soni, CFA 4 minutes reading from Bitcoin

FTX B bailed out Alameda, KYC and other Crypto Exchanges: What Happened And What Did It Mean?

The cryptomarket is down.

btc prices keep dropping.

There are rumors that CryptoCom and other crypto exchanges are bankrupt.

Here's a summary of what led to all of this:

(Thread)

Over the last week or so, FTX, the 2nd largest crypto exchange, declared Chapter 11 bankruptcy.

FTX financial statements showed an 8 BILLION HOLE when reviewed for a potential bailout.

FTX gave money to its sister company, AlamedaResearch. Both were, at one point, led by the same person: SamBankmanFried (@SBF_FTX

The loans from FTX came in the form of user funds.

A lot of that money was lost due to gambling, or stolen by employees.

Crypto exchanges that don't hold user funds 1:1 get exposed quickly when users start withdrawing their funds.

Eventually there's nothing left to be withdrawn.

Exchanges are forced to halt withdrawals.

But where do customer funds go?

When you hold crypto on an exchange, you are LEGALLY a creditor to that exchange. You have no protections.

Exchanges take advantage.

During bull runs, they invest in risky projects and lend MILLIONS to other exchanges to earn interest.

During bear markets, digital asset prices can drop 80%+.

Combining a bear market with massive interest rate increases leads to defaults on loans when interest payments are missed.

In this case, Alameda lent hundreds of millions to firms during the last bull market.

Those borrowers went bankrupt during the current bear market.

FTX was funneling money from users to Alameda Research in order to allow Alameda to continue operations.

Simply put:

Alameda was in trouble, FTX bailed out Alameda. All of this was at the expense of users of FTX.

There are a lot of parallels between FTX and the traditional banking system.

Whatever is happening with reserves in the crypto community is magnitudes worse in the traditional financial system.

FTX bailed out ALAMEDA with user funds.

In traditional finance, INCOMPETENT BANKS AND BUSINESSES are bailed out by GOVERNMENTS using TAX DOLLARS (YOUR MONEY) because they "provide a service we need."

In traditional finance, it's LEGAL and ENCOURAGED for

banks to not hold customer funds 1:1.

In fact, banks in the "real world" can get away with having nearly nothing in reserves.

This is called FRACTIONAL RESERVE BANKING.

The great financial crash in 2009 happened because banks gave money they don't have to people who aren't qualified to borrow it.

Interest rates went up and borrowers defaulted on loans.

Back to crypto:

This will keep happening. More exchanges will eventually go bankrupt.

Anyone that keeps their funds on those exchanges will lose everything.

The only way to prevent this?

Store your crypto and btc in a cold wallet.

NOT YOUR KEYS, NOT YOUR COINS.

This post is based on this twitter thread.

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