What happened to FTX, and what does it mean for ordinary investors?

The collapse of FTX in November 2022 was one of the most dramatic financial implosions of the decade. A company that had been valued at $32 billion simply ceased to exist within a matter of days, taking billions of pounds of customer funds with it. For anyone trying to understand crypto risk, this story is essential reading.

Sam Bankman-Fried, known almost universally as SBF, built FTX into the second-largest cryptocurrency exchange in the world in just a few years. He cultivated a reputation as a responsible voice in the industry, appeared before US Congress, donated generously to political causes, and positioned himself as a champion of what he called effective altruism. He was on the cover of magazines. His face was everywhere. FTX sponsored sports arenas. Its brand was impossible to miss.

Underneath all of this was something quite different. Investigations and court proceedings later revealed that FTX had been funnelling customer funds to Alameda Research, a trading firm that SBF also ran. The two entities were supposed to be completely separate. They were not. Alameda used the customer money to make speculative trades, fund investments, and cover losses. When those positions went wrong, there was nothing left to return to customers.

The beginning of the end came when CoinDesk published a report in early November 2022 questioning the state of Alameda’s balance sheet. The report revealed that a large portion of Alameda’s assets were held in FTT, which was a token created and largely controlled by FTX itself. This raised serious questions about whether the whole structure was more fragile than anyone realised.

Binance, then the world’s largest crypto exchange, had previously received a large allocation of FTT tokens as part of an earlier investment exit. Its chief executive Changpeng Zhao, known as CZ, announced publicly that Binance would sell its entire FTT holdings in response to the concerns. That announcement triggered a wave of withdrawals from FTX customers who grew nervous. In a single day, more than six billion dollars worth of assets was requested for withdrawal. FTX could not process them. The exchange froze withdrawals entirely.

The collapse happened over a matter of hours. Binance initially agreed to acquire FTX and then walked away the following day after reviewing the books. No other buyer came forward. FTX filed for bankruptcy in the United States on 11 November 2022. Sam Bankman-Fried resigned as chief executive and was replaced by John Ray III, who had previously overseen the Enron bankruptcy. In his initial filing, Ray wrote that he had never in his career seen such a complete failure of corporate controls.

The estimated shortfall in customer funds was eventually put at around eight billion dollars. Customers who had deposited assets on the exchange found themselves unable to access them. Many are still waiting for recoveries years later, though the bankruptcy proceedings have been somewhat more productive than initially feared, with a meaningful portion of claims expected to be paid in cash rather than returned as cryptocurrency.

Sam Bankman-Fried was arrested in the Bahamas in December 2022 and extradited to the United States. He stood trial in October 2023, was convicted on seven counts of fraud and conspiracy, and was sentenced in March 2024 to 25 years in prison. Several of his close colleagues, including Caroline Ellison, who ran Alameda Research, pleaded guilty and cooperated with prosecutors.

For ordinary investors, the lessons from FTX are specific and worth taking seriously. The first is that an exchange is not a bank. When you hold assets on a centralised exchange, you are trusting that business to safeguard them. There is no equivalent of the Financial Services Compensation Scheme protection for crypto assets held on exchanges, at least not in the UK as things stand. The regulatory environment is changing, and the FCA has been tightening requirements for crypto firms operating here, but the core message remains: you are taking on the financial risk of the exchange itself, not just the risk of the underlying assets.

The second lesson concerns the importance of self-custody. The phrase not your keys not your coins is repeated constantly in crypto circles, and FTX is the clearest possible illustration of why. If you hold crypto in a wallet where you control the private keys, no exchange failure can touch it. That comes with its own responsibilities around securing those keys, but many people who came through the FTX collapse intact were those who had already moved their assets off the exchange into personal wallets.

The third lesson is about the limits of reputation. FTX attracted customers and investors partly because SBF was so visible, so apparently credible, and so loudly committed to responsible behaviour. That credibility was constructed. Due diligence matters regardless of how prominent or polished a company appears. In traditional finance, investor protection frameworks force a degree of transparency that crypto exchanges were simply not subject to at the time. That gap is one reason regulators worldwide have moved quickly since the collapse.

There is also a fourth, quieter lesson. The interconnectedness of the crypto industry means that a single large failure can ripple outward very fast. The collapse of FTX accelerated pressure on other firms, contributed to broader market declines, and put stress on businesses that had lending relationships with Alameda. Crypto is not a collection of isolated islands. When something large falls, it tends to fall on other things.

None of this means the entire industry is fraudulent. Most exchanges operating today are not FTX. But FTX is a useful reminder that spectacular growth, celebrity endorsements, and confident founders do not add up to safety. The questions worth asking before placing assets anywhere are simple: who holds the assets, where are they held, what happens if this company fails tomorrow, and what recourse would you have?

The FTX story has a villain, and he has been sentenced. But the conditions that allowed it to happen, rapid growth, loose oversight, customer assets commingled with trading operations, were not unique to FTX. Understanding what went wrong there is part of understanding what to look for everywhere else.

Disclaimer: Cryptocurrency investments are highly volatile and speculative. Their value can rise and fall sharply, and you could lose all of your investment. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research before making any investment decision.