How the FTX Meltdown Dragged FTX, Solana, Bitcoin, Ethereum, and Binance Down This Week

What happened

Cryptocurrencies are having a rough week as one of the world's most popular crypto-trading exchanges experienced a financial crisis, culminating in a Chapter 11 filing for bankruptcy protection. Here's how the FTX cryptocurrency exchange's financial meltdown has affected some of the leading digital currencies, according to data from S&P Global Market Intelligence and CoinGecko.

Price data from CoinGecko.com, measured from market close on Friday, Nov. 11 to 9:30 a.m. ET on Friday, Nov. 11.

So what

The first rumblings of trouble were heard last week, as the CoinDesk news site reviewed a leaked balance sheet for crypto billionaire Sam Bankman-Fried's investment firm, Alameda Research. The document showed a much closer connection than expected between Alameda and the FTX cryptocurrency exchange, both under Bankman-Fried's control.

The earthquake gained momentum as investors and press outlets dug deeper into the leaked document over the weekend. It turned out that more than $6.2 billion of FTX's $14.6 billion in financial assets consisted of the FTX Token (FTT), which is used to distribute incentives and support leveraged trading on the FTX platform.

In other words, more than 40% of FTX's financial assets were based on a cryptocurrency directly under FTX CEO Bankman-Fried's thumb, and it carried no value to speak of outside the FTX ecosystem.

The situation reached a tipping point on Sunday, Nov. 6, as Binance, an even larger crypto exchange, said it would liquidate its investment in FTX. The FTX token fell more than 12% that day. Cryptocurrencies at arm's length from the FTX ecosystem were still steady over the weekend.

By Tuesday, Nov. 8, FTX customers had started mass withdrawals of their crypto assets on the platform. The exchange had to pause withdrawals as it ran out of liquid cash to cover the fund transfers, and then Binance offered to save FTX's clients by buying the entire platform. This complex turn of events led to massive price drops across the entire cryptocurrency sector, as investors saw one of the most trusted platforms in the business teetering on the edge of bankruptcy.

The leaked balance sheet also showed that FTX held more than $1.2 billion of Solana (SOL -4.28%) tokens, making that digital currency especially vulnerable to the FTX crash. Solana's price plunged 25% lower on Tuesday and continued to plunge for a couple of days after that. Binance also canceled its buyout bid after reviewing the platform's financial health in greater detail.

The FTX document didn't explicitly detail any holdings of leading crypto names such as Bitcoin (BTC -1.60%) or Ethereum (ETH -2.28%), but the collapse of a leading crypto exchange had to affect every corner of that market. FTX managed a 24-hour trading volume of $2 billion last Friday, just behind Coinbase Global (COIN -9.09%) at $3 billion and Binance's dominant $24 billion daily volume. Now, the formerly third-largest exchange is barely hanging on among the top 100 exchanges as trading volumes have cratered.

Furthermore, the FTX Token has addresses on three different blockchain networks. The loss of a token project that recently was worth more than $3 billion could undermine the value of these three smart contract networks -- Ethereum, Solana, and the Binance Token (BNB). Again, Solana is the smallest asset on this list, which makes it more vulnerable to financial fallout than its larger peers.

The FTX story took another sobering turn to end the week.

Bankman-Fried tried to raise more than $9 billion from friends, industry colleagues, and venture capital firms last night, but the last-ditch attempt to save FTX didn't work out. Friday morning, Bankman-Fried resigned from the CEO office and FTX filed for Chapter 11 bankruptcy protection.

Chapter 11 is not exactly the end of the line, but it's also not a good sign. The trading platform remains available and might return to the crypto trading market after reorganizing its shattered financial structure. Many companies have thrived after surviving a Chapter 11 filing. The next step down would be a Chapter 7 liquidation under the bankruptcy code, where the company shutters its business, sells everything it can, and uses the funds to reimburse a small portion of its debts. FTX isn't there yet.

Either way, the crypto sector was fundamentally shaken by the sudden collapse of a major trading system. Some headlines have compared the FTX meltdown to the Lehman Brothers implosion in 2008, which brought fundamental changes to banking regulations and launched several economic stimulus acts.

Now what

The FTX crisis could be the call to action that finally brings clarity to cryptocurrency policies in the U.S. and around the world. The Securities and Exchange Commission and Justice Department are already investigating this crisis, looking for policy ideas that could shield investors from this type of crypto trading catastrophe.

From that perspective, maybe the FTX crash will be remembered as a positive development in the long run. The cryptocurrency market won't mature until federal officials have set up their regulatory framework for taxes, trading rules, and more. The triggering crisis is a painful sting, especially if any of your assets were lost or trapped along the way, but anything that inspires lawmakers and regulators to take these issues more seriously could be good for the crypto sector as a whole.