What's the impact of the FTX collapse on the crypto trading industry?

If you were told that a $32 billion company can collapse in a matter of hours, you will most likely have a question, how? That's what everyone has been thinking about ever since FTX, the world's second-largest crypto exchange, announced bankruptcy, with its founder and CEO stepping down from his position, following this huge controversy. Not everything is known as to what happened exactly, and it will require a huge investigation to get to the roots, but what we know now is that FTX has used around $10 billion of its assets to bail out its sister company Alameda Research. With everything taking place, the crypto market, which was already in an awful state, managed to fall even lower. Because of this, many investors and traders are wondering as to what impact will this collapse have on the crypto trading industry.

State of the crypto trading industry

The crypto market was already in an awful state even before the FTX collapse. Ever since reaching astronomical highs in November 2022, cryptocurrencies have been on the downfall, with Bitcoin going from $69,000 to around $18-20 thousand being a good example of it. But despite this, the main people who suffered from this crash were investors and not traders. A Crypto market crash always brings huge volatility to the market, which gives traders the opportunity of making big profits with small capital. 

The FTX collapse further fueled this volatility, and looking at it from a pure trading perspective it can be seen as something positive. Big volatility results in the prices of tokens jumping up and down throughout the day and a big number of traders are taking advantage of this. With traders using free crypto trading apps such as Bitcoineer, these traders are looking at the market and trading according to the trend of the day. If traders see that everything is down, most traders use short positions, while if they see that big tokens are showing greens, they open long positions to gain profits. So we can say with confidence that day traders are the ones who benefit most from this FTX collapse.

Problems caused by FTX

While day traders might somewhat benefit from this collapse, in general, this is devastating news for the crypto trading industry. This FTX collapse has shown us that being the second-largest crypto exchange does not mean that it is absolutely safe to trade on this exchange and keep your funds there. With this, traders started to wonder, what protects other exchanges from going through the same thing? especially in this dire situation, with exchanges such as Crypto.com already coming under fire.

As reported by The Guardian, most of the traders who suffered from this FTX collapse were institutional traders, who had huge investments in FTX, while small institutional traders have not seen big losses. But with the current FUD, there is a big possibility that these small traders might also suffer from the long-term consequences caused by this collapse. We should expect the tightening of regulations placed on crypto trading and cryptocurrencies in general. And while these institutional traders were already under some regulations, small retail traders, who took the advantage of this lack of regulations, might need to take a second look at this market if regulations get tighter and the advantages that this lack of regulation brought get removed in favor of long-term safety.

What happened exactly with FTX?

If you are reading this article and not sure what we are talking about, then you probably live under a rock. While we don’t know many inner details, the general overview of this situation is as follows. Everything started when Coindesk made a report regarding Alameda Research, an investment firm owned by FTX CEO, Sam Bankman-Fried, where it was mentioned that most of Alameda Research's holdings consist of FTT. After this Binance made an announcement that they will be selling all of their FTT holdings worth more than $500 million. This caused a huge panic and people started to withdraw all of their funds from FTX, which caused a liquidity crisis. This made it clear that FTX did not have the number of assets that they were reporting, and it became clear that these assets were used to bail out Alameda Research. After this, Binance and FTX made an announcement that they agreed on the sale of FTX to Binance, but after looking through the books, Binance backed down from the deal. This left FTX and SBF with only one option, filing for voluntary Chapter 11 proceedings in the US and announcing bankruptcy of FTX and around 130 partner/sister firms.