FTX, once the second largest cryptocurrency exchange in the world, is now worthless, according to one of the company’s early investors.
In a note to partners, the venture capital firm Sequoia announced it had written down its investment in FTX, worth $150m (£130m), to nothing.
“In recent days, a liquidity crunch has created a solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0,” the investors wrote, in a message signed Team Sequoia.
Other investors have lost similar sums, including the Ontario Teachers’ Pension Plan, which last year invested about $400m in the exchange, valuing FTX at $25bn.
The cryptocurrency market came under pressure after the FTX crisis, with the cornerstone digital asset, bitcoin, falling 7.6% over the past 24 hours to $16,775 and the second largest, ethereum, falling 4.4% to $1,205.
The bank run-style “liquidity crunch”, fueled by a rush of withdrawals from FTX, led to a pause in all cash outflows on Tuesday morning. But for the crunch to have become a solvency risk would suggest that the company had been investing customer deposits in illiquid assets, forcing it to choose between a rushed sale at depressed valuations, or a halt on withdrawals altogether.
In posts sent shortly before FTX was engulfed in crisis, its owner, Sam Bankman-Fried, insisted that was not the case. “FTX is fine. Assets are fine. FTX has enough to cover all client holdings,” he said in tweets that he has since deleted. “We don’t invest client assets (even in treasuries).”
Since then, Bankman-Fried has changed his messaging, telling investors that the company needs $8bn to cover withdrawal requests, according to multiple reports.
The sudden collapse in value was prompted by leaked documents which implied that Alameda Research, a hedge fund tightly intertwined with FTX through its common owner, Bankman-Fried, was in effect insolvent.
Alameda’s accounts rested on a token, FTT, that was issued by FTX and had no value other than that guaranteed by the exchange, according to the documents.
That revelation turned into a crisis when Binance, the largest cryptocurrency exchange, announced it would sell its own major stake in FTT. The fire sale that followed crashed the value of the token far below the $22 floor that FTX had committed to support, and prompted the equivalent of a bank run at FTX itself, as customers raced to withdraw their deposits faster than the exchange could process them.
The fight between the two exchanges briefly turned into an alliance, as Binance agreed to make a non-binding offer to bail FTX out and merge with it. But on Wednesday night, the deal fell through.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance said.