The FTX collapse explained: What you need to know

FTX wasn’t the first cryptocurrency centralized exchange (CEX) to go bankrupt, but its 2022 collapse was one of the most devastating. Once a top trading platform backed by celebrity endorsements from Tom Brady, Larry David, and Steph Curry, FTX unraveled after a CoinDesk report raised concerns about its financial ties and the potential misuse of customer funds. Panic spread, investors rushed to withdraw their assets, and the company spiraled into bankruptcy.

The fallout was swift. Billions in customer funds disappeared, trust in centralized cryptocurrency exchanges took a major hit, and regulators ramped up their scrutiny of the crypto industry. While the market eventually recovered, the impact of FTX’s collapse still lingers – especially for those directly affected.

In this guide, we’ll explain how it all unfolded and share the latest legal developments.

Why did FTX go bankrupt?

Many factors contributed to FTX’s collapse, but at its core, the downfall came down to poor risk management and financial mismanagement. Bankruptcy proceedings revealed an $8.9 billion shortfall, mainly due to FTX using customer funds for high-risk investments and personal expenditures. While the exchange operated in this precarious state for months, it was highly vulnerable to a liquidity crisis. When news reports and social media speculation raised concerns about FTX’s financial health, customers rushed to withdraw funds (a "bank run"). With insufficient reserves to cover withdrawals, FTX was forced to halt transactions and file for Chapter 11 bankruptcy.

The role of Alameda Research in FTX's collapse

FTX’s financial troubles didn’t happen in isolation. A key contributor was its close ties to Alameda Research, a crypto trading firm founded by FTX CEO Sam Bankman-Fried. Although Alameda Research was supposed to operate independently, FTX secretly funneled billions in customer funds to cover Alameda’s trading losses.

Alameda Research also relied heavily on FTX’s native token, FTT, as collateral for loans and high-risk trades. This set off a risky cycle. When FTT’s price climbed, Alameda’s borrowing power grew, allowing it to take on even greater exposure. But when FTT’s value fell, the firm faced mounting margin calls and liquidations, exposing its fragile position. Even after receiving billions from FTX, Alameda Research couldn’t cover its debts, and its collapse played a key role in FTX’s downfall.

Social media and the liquidity crisis

The crisis accelerated after a CoinDesk report raised questions about Alameda’s financial health and its ties to FTX. The report spread rapidly across crypto news sites and social media, particularly X (formerly Twitter). The situation worsened when Binance, a rival crypto exchange, announced plans to sell off its FTT holdings – worth around $500 million at the time. Investors rushed to withdraw funds from FTX, draining liquidity and pushing the exchange into a full-blown crisis.

As FTX scrambled for emergency funding from investors and potential buyers, including Binance, it became clear there wasn’t enough capital to fill the gap. With no way to make customers whole, FTX had no choice but to file for bankruptcy.

Timeline of events leading to FTX's collapse

It took only a few weeks for FTX to go from a leading crypto exchange to a complete disaster. While its vulnerabilities accelerated the collapse, several key events set the downfall in motion:

• Nov. 2, 2022: CoinDesk published a report revealing financial ties between FTX and Alameda Research, raising concerns about FTX's financial stability. 
• Nov. 6, 2022: Binance announced plans to liquidate its $500 million FTT holdings, leading to a sharp decline in FTT's value and increasing fears about FTX's liquidity. 
• Nov. 8, 2022: FTX halted user withdrawals amid a liquidity crisis. CEO Sam Bankman-Fried sought assistance from Binance, resulting in a non-binding agreement for Binance to acquire FTX.
• Nov. 9, 2022: Binance withdrew from the acquisition deal, citing concerns over FTX's financial practices and ongoing investigations. 
• Nov. 11, 2022: FTX and its affiliated entities, including Alameda Research, filed for Chapter 11 bankruptcy protection in the United States.
• Nov. 12, 2022: Reports emerged of unauthorized transfers totaling approximately $400 million from FTX accounts, suggesting a potential hack.
• February 2024: The U.S. District Court in Washington, DC, indicted three individuals with the $400 million hack after FTX's fall. 
• March 2024: The U.S. District Court for the Southern District of New York found Sam Bankman-Fried guilty of multiple counts related to fraud and sentenced him to 25 years in prison.  
• August 2024: The U.S. District Court for the Southern District of New York ordered bankrupt cryptocurrency exchange FTX to pay $12.7 billion in relief to its customers. This ruling, announced by the Commodity Futures Trading Commission (CFTC), included $8.7 billion in restitution and $4 billion in disgorgement to compensate victims.
• October 2024: FTX's bankruptcy plan received court approval, allowing the company to begin repaying customers using recovered assets.

How do FTX's liquidity issues affect you?

In late 2024, FTX's restructuring board announced plans to begin refunding users in 2025. According to disclosure statements, FTX aims to repay investors in full, plus interest, starting with "convenience classes" – those with claims of $50,000 or less. To facilitate the process, FTX has partnered with Kraken and crypto custodian BitGo to distribute funds. Those affected by the FTX collapse should monitor the restructuring process through FTX’s official portal and stay vigilant against phishing scams.

FTX operated two exchanges: FTX Global and FTX.US. FTX Global served users in multiple countries outside the U.S. and was directly impacted by the insolvency crisis. Due to its larger financial burden and the complexity of claims across different jurisdictions, FTX Global customers may face a longer repayment timeline.

In contrast, FTX.US was a separate entity that served U.S. users exclusively. Although it was affected by FTX’s collapse, its smaller user base and relative independence from FTX Global helped limit the damage. While withdrawals were initially paused, FTX.US later resumed them with restrictions. FTX.US customers will likely recover funds sooner than FTX Global users, but all affected users should stay updated through the official restructuring portal.

What is FTX’s impact on the crypto market?

Even as FTX investors affected by the collapse work through the claims and repayment process, the fallout continues to ripple through the crypto industry. From traders to exchange operators to regulators, FTX’s downfall has reshaped how the entire crypto space views and handles digital assets.

Surge in self-custody

Following the FTX collapse, on-chain analytics firms like Glassnode reported a spike in users moving their cryptocurrencies from CEXs to self-custodial wallets. Unlike keeping assets on exchanges, self-custodial wallets give users complete control over their funds through a private key. This shift reflected growing distrust in centralized institutions.

Rise of proof-of-reserves

To restore confidence and prevent another FTX-style collapse, more exchanges began publishing proof-of-peserves (PoR) reports to verify their solvency in real time. These reports use blockchain-based Merkle trees to organize and display reserve balances without exposing customer data. Since FTX’s downfall, PoR reports have become more common on exchange websites and third-party aggregators like CoinMarketCap

Legal precedents

The scale of the FTX collapse set key legal precedents for the crypto industry. The ongoing bankruptcy proceedings and lawsuits will likely shape how future crises are handled and establish new accountability measures for crypto businesses. FTX’s legal battles could also influence how digital assets are classified and regulated across different jurisdictions.

Regulatory clarification

In response to FTX’s failure, regulators worldwide accelerated efforts to introduce clearer legal frameworks for crypto. In the U.S., proposals like the FIT21 Bill aim to define regulatory oversight, while in the European Union, the Markets in Crypto-Assets Regulation (MiCA) framework has gained momentum. Policymakers continue to develop new rules that aim to balance innovation, investor protection, and risk mitigation.

Analyze crypto tax deductions with CoinTracker

If you were affected by a bankrupt exchange like FTX, Celsius, or Voyager, you may have options to claim deductions on your tax forms. CoinTracker’s Portfolio Tracker organizes all your transactions from these platforms, making it easier to document your trading activity. Working with a crypto CPA can help determine the best way to report these details and potentially claim losses on your tax return.

With CoinTracker, tracking and managing your crypto taxes doesn’t have to be complicated. Get started with a free account today and discover how easy it is to stay on top of your crypto taxes. 

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.