With the collapse of FTX, the 2nd largest crypto platform globally, a lot of new things are surfacing, and it doesn’t sound nice. First of all, we learned that user funds that were initially wired to Alameda research never returned to FTX. And now, it looks like the crypto exchange FTX even gave secret trading advantages to Sam’s hedge fund. That means if the hedge fund opens a position, they are more likely to profit than normal users.
FTX and its debacles
As a normal user, if you engage in margin trading, your trade will automatically be closed if it hits the stop loss or liquidation price. That’s because your balance would turn into zero at that point, and allowing you to trade any further means FTX would be paying out of its own pockets for any further losses in the trade. However, for Alameda’s research, the exchange allowed them to trade even when their positions were liquidated.
There are two major problems with this. First of all, if the trade never turns profitable, FTX would be paying for the losses with user funds. Secondly, it gives the firm an unfair advantage over its trade. Now imagine if one of the trades Alameda has opened is in a loss of $200 million, and there are multiple withdrawals at the time; the position has to be closed, leading to even bigger losses.
Apart from Alameda, Sam Bankman has also been charged with wire fraud and conspiracy. He has 8 counts of criminal indictments, which could get him more than 100 years in prison. The current CEO of FTX said he has never seen such a loss of corporate controls. The lack of any form of documentation and risk management was the reason why FTX failed.
What next?
Now that Sam Bankman has been arrested, he will soon appear in court for questioning. John Ray has already given us a lot of answers, but Sam has been awful in his testimony and answers going in circles. He was even called out in the recent congress hearing for his disrespectful testimony.
What are your thoughts as reports show that FTX gave trading advantages to Sam’s hedge fund? And do you think Sam Bankman will go to prison? Let us know in the comments below. And if you found our content informative, share it with your family and friends.
Also Read: Binance Knowingly put FTX out of business, says Kevin O’Leary.