FTX: When a Trusted Exchange Was Secretly Insolvent
FTX, one of the largest cryptocurrency exchanges in the world, collapsed within days after reporting revealed customer funds had been used to cover losses at a related trading firm — a stark lesson in counterparty and custody risk.
- Reported valuation before collapse
- ~$32 billion
- Time from first reports to bankruptcy
- About one week
- Outcome
- Founder later convicted of fraud
What happened
FTX was, at its peak, one of the largest cryptocurrency exchanges in the world by trading volume, backed by prominent investors and widely marketed as a trustworthy, well-capitalized platform. Customers deposited cryptocurrency and cash onto the platform to trade, generally trusting that their funds were held safely and separately from the exchange's own business operations, as is standard practice at reputable financial institutions.
In November 2022, reporting revealed that a large portion of customer funds had, in fact, been transferred to Alameda Research, a separate trading firm founded by the same individual, and used to cover Alameda's trading losses and fund other expenses — leaving FTX unable to return customer deposits on request.
Once the extent of the shortfall became clear, a wave of withdrawal requests exceeded what FTX could pay out, and the exchange filed for bankruptcy within about a week of the first reports. Its founder, Sam Bankman-Fried, was later convicted of fraud and related charges.
Why it still matters
FTX is the defining modern lesson in counterparty and custody risk: an asset sitting on an exchange is not the same as an asset you directly control, and the platform's reputation, size, or the prominence of its investors is not proof that customer funds are actually segregated and safe.
For anyone holding assets on any third-party platform — crypto exchange, broker, or otherwise — it reinforces a simple, practical habit: keep on any single platform only what you need for active trading, rather than treating it as a long-term store of savings, precisely because you generally cannot verify from the outside whether your funds are being handled the way you assume.