The FTX Collapse: What Happened and Why It Mattered

One week, it was one of the most trusted names in crypto, backed by major venture capital firms and headed by a figure regularly compared to Warren Buffett in glowing media profiles. The next week, it was bankrupt, and billions of dollars in customer funds were gone.

FTX, once the world’s second-largest cryptocurrency exchange by trading volume, collapsed in November 2022 after reports revealed that its sister trading firm held a balance sheet heavily concentrated in FTX’s own exchange token, and that FTX had reportedly used customer deposits to cover that firm’s trading losses — a direct violation of the basic promise that customer funds are kept separate and safe.

The collapse unfolded with extraordinary speed. A leaked balance sheet raised alarm, a competing exchange announced it would sell its holdings of FTX’s token, a wave of customer withdrawals followed that FTX couldn’t meet, and within about a week the company had gone from a functioning, celebrity-endorsed exchange to filing for bankruptcy, with its founder later convicted on criminal fraud charges.

The damage extended well beyond FTX’s direct customers. Because FTX and its affiliated trading firm had significant dealings across the crypto industry, the collapse triggered a wave of contagion, dragging down other firms with exposure, and deepened an already difficult bear market that had begun earlier in 2022.

FTX’s failure prompted a serious industry-wide reckoning around exchange transparency, with growing calls for proof-of-reserves systems that let customers independently verify an exchange actually holds the assets it claims to. It also accelerated regulatory attention on crypto exchanges globally.

FTX stands as one of the starkest illustrations in crypto history of exactly why self-custody and not your keys, not your coins became such a core piece of Bitcoin culture — a lesson the Mt. Gox collapse had already taught the industry once before, years earlier.

Want to revisit how Mt. Gox’s earlier collapse shaped this same lesson? Continue learning in the Bitcoin Academy.