A key lesson from the FTX downfall

A good reputation does not mean good financial health.

Last month, investors still saw FTX as an impressive company. Celebrity and media endorsements enhanced the crypto firm’s prestige. Today, those investors have lost billions.

It’s impossible to know what’s going on inside your customer’s business. Any firm, including the most dependable, can fail at any time. Good standing does not equate to good financial health.

Two months ago, cryptocurrency exchange firm FTX still had a sterling reputation. Reviewers in the media praised it as “extremely secure”. It had an “excellent track record”. In November last year, the cryptocurrency news portal CoinBureau published an article with the headline, “FTX Review: The BEST Crypto Exchange Ever?”. The piece reviewed FTX in glowing terms, praising FTX CEO and founder Sam Bankman-Fried as an “open and trustworthy person”.

In June 2021, NBA team Miami Heat renamed their stadium FTX Arena. Eric Woolworth, head of business operations at Miami Heat, described FTX as “an exciting, young company” in an industry growing “at lightning speed”. The press release announcing the partnership was a torrent of superlatives: “ground-breaking”, “trailblazing”, “first-of-its-kind”.

The deal granted FTX a sort of government imprimatur. Because, according to the Miami Heat, it would not have been possible without the support of Miami’s mayor Daniella Levine Cava. Several other local government officials also helped secure the agreement. Miami’s elected representatives seemed to trust FTX as much as the Miami Heat did.

Public figures with influence far beyond Miami also boosted FTX and Sam Bankman-Fried. In May 2022, Forbes magazine reported on the Crypto Bahamas conference, co-organised by Bankman-Fried. Forbes called the conference “Crypto’s Most Exclusive Gathering”. The Forbes staff writer who attended the event reported on keynote addresses by Tony Blair and Bill Clinton. Both appeared on stage with Bankman-Friend during audience Q&A sessions. “The high-level event”, went the Forbes article, “has underscored the establishment of FTX […] as a gravitational force” in the cryptocurrency industry. Katy Perry, Steve Aoki, Tom Brady, and former presidential candidate Andrew Yang also attended the conference. So did a collection of crypto industry figureheads.

Tough questions were not the order of the day.

On November 2nd of this year, FTX began to collapse. Internal documents leaked online questioned the company’s ability to meet its debts and obligations. In ten days, FTX went from a “gravitational force” in the cryptocurrency industry, to bankrupt. Bankman-Fried has resigned as CEO. Hundreds of thousands of users have lost money, amounting to billions of dollars. Major shareholders, including venture capital firms, celebrity endorsers and a pension fund, are set to lose more than 1.8 billion USD.

Why did FTX go bankrupt ? When the firm’s financial health became suspect, customers demanded withdrawals from the exchange. But why was FTX in financial trouble in the first place ? Bankman-Fried blamed accounting problems. Yet at the start of the collapse, Bankman-Fried tried to assure investors that FTX was stable.

Some reports claim FTX was a scam from the outset. Others say Bankman-Fried misused client funds. According to the Australian Financial Review, “Bankman-Fried mixed up customers’ money with his own and then lost it”. What this story shows is that any firm can default, leaving you in trouble. Chasing debts can be a complicated, costly process, and there’s no guarantee you will redeem your money. Or even part of it. No business needs this kind of stress. No person does either.

It is far better to protect yourself before a default occurs. Trade credit insurance strengthens your business. It is as necessary as flood or fire insurance.

Assessing the health of a customer’s business is impossible. Nobody can read minds. Nobody can predict the future. Investors didn’t expect FTX to crumble. FTX radiated positivity, trust, and ingenuity. Their CEO was an industry good-guy.

To operate with complete peace of mind, buy a trade credit insurance policy. You can work with a broker to tailor the policy to your needs, and the needs of your business. Your broker will work with you now and in the future. They’ll aid you with insurance, risk management, and bad-debt protection. There’s every reason to buy trade credit insurance, and no reason to avoid it.