The Alameda gap and crypto liquidity crisis explained

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2 years ago

November 7, 2023

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FTX collapse: Unraveling the cryptocurrency crisis of November 2022

In November 2022, the cryptocurrency world was rocked by the collapse of FTX, one of the largest cryptocurrency exchanges. The collapse was triggered by a liquidity crisis at FTX, which was caused by a combination of factors, including mismanagement of customer funds and risky trading practices by FTX’s sister company, Alameda Research.

The collapse of FTX had a ripple effect across the crypto market, causing a sharp decline in cryptocurrency prices, a drain of liquidity and a loss of confidence in the crypto industry. It also raised serious questions about the safety and security of customer funds on cryptocurrency exchanges. The crypto industry’s lack of risk management standards was exposed through the crisis.

FTX has filed for bankruptcy, revealing a debt of over $3 billion to its creditors. Additionally, the exchange is unable to locate approximately $8.9 billion worth of customer assets. The exact amount of money lost by customers is difficult to determine, as some customers may have been able to withdraw their funds before the exchange suspended withdrawals. However, it is estimated that customers lost billions of dollars in the FTX crash.

The collapse of FTX caused a sharp decline in cryptocurrency prices. The total market capitalization of the crypto market fell from over $1 trillion in November 2022 to under $800 billion in December 2022. This represents a market collapse of over $200 billion in dollar terms.

Sam Bankman-Fried’s strategic path

SBF saw an opportunity to create wealth at an unparalleled pace by combining the ICO method of token creation and subsequent leveraging.

SBF saw an opportunity to profit by creating a new cryptocurrency exchange that would exploit the shortcomings of existing exchanges. Bankman-Fried began by setting up a quantitative trading firm called Alameda Research.

Alameda Research used sophisticated algorithms to trade cryptocurrencies on a variety of exchanges. Alameda Research was very successful, and it quickly became one of the largest cryptocurrency traders in the world.

In 2019, Bankman-Fried launched FTX, a cryptocurrency exchange designed to be more user-friendly and efficient than existing exchanges. FTX also offered a number of features that were not available on other exchanges, such as margin trading and derivatives trading. However, none of the regulatory controls typically needed by mainstream financial services trading platforms were addressed.

Relationship between FTX and Alameda Research

FTX and Alameda Research were closely linked. Bankman-Fried and Caroline Ellison were the CEOs of FTX and Alameda Research respectively. However, Bankman-Fried controlled a majority of the shares in both companies. Alameda Research also used FTX as its primary exchange.

The close relationship between FTX and Alameda Research allowed Bankman-Fried to engage in a variety of fraudulent activities, including:

Misappropriating customer funds: Bankman-Fried transferred customer funds from FTX to Alameda Research without the customer’s consent. He used these funds to cover Alameda Research’s losses and to fund his own lavish lifestyle.
Manipulating the cryptocurrency market: Alameda Research used its large trading volume to manipulate the prices of cryptocurrencies on FTX. This allowed Bankman-Fried to profit from insider trading.
Offering fraudulent financial products: FTX, under Bankman-Fried’s leadership, offered unregulated financial products like margin and derivatives trading. This lack of oversight allowed him to defraud customers by selling these products without disclosing the associated risks.

FTX scam and Alameda gap unveiled

The scam began to unravel in November 2022 when it was revealed that Alameda Research held a large position in FTT, the native token of FTX.

The report sparked a sell-off of FTX Token (FTT), which caused the token’s price to plummet. It also raised concerns about the financial health of Alameda Research and FTX. This led to a liquidity crisis at FTX, as customers rushed to withdraw their funds from the exchange.

FTX was unable to meet the withdrawal demands, and it was forced to suspend withdrawals. FTX also filed for bankruptcy on Nov. 11, 2022. The collapse of FTX had a devastating impact on the crypto market.

In November, a significant decrease in liquidity within the crypto market was coined as the “Alameda gap” by blockchain data firm Kaiko. This term emerged due to the notable role played by Alameda Research, the largest market maker during that period.

The Alameda Gap represented a substantial decline in available liquidity, impacting trading volumes and market stability. This phenomenon underscored the influence of major market participants and highlighted the intricate dynamics that govern cryptocurrency markets.

While the FTX episode may have been the last domino to fall in a series of bankruptcies that were filed during 2022, it was easily the biggest event of the year, and it put the industry under a legal and regulatory microscope.

The Bankman-Fried trial

SBF was arrested in the Bahamas on Dec. 12, 2022, after United States prosecutors filed criminal charges against him. He was extradited to the U.S. in January 2023 and went on trial in October 2023.

The arrest and trial of SBF was a major development in the crypto industry. It was the first time that a major crypto founder had been arrested and tried on criminal charges. Bankman-Fried was charged with seven counts of fraud and conspiracy.

The key witnesses for the prosecution were:

Caroline Ellison, Bankman-Fried’s ex-girlfriend and the former CEO of Alameda Research
Nishad Singh, former FTX engineering director
Gary Wang, co-founder of FTX

Ellison, Singh and Wang all pleaded guilty to multiple charges and cooperated with the prosecution. They testified that Bankman-Fried knowingly misled investors and customers about the financial health of FTX and Alameda Research. They also testified that Bankman-Fried used FTX customer funds to cover losses at Alameda Research and to fund his own lavish lifestyle.

Bankman-Fried was found guilty of all seven charges on Nov. 2, 2023. He faces a maximum of 115 years in prison. Bankman-Fried denied all of the charges against him. He said that he made mistakes but that he did not commit any crimes.

The seven charges against Sam Bankman-Fried

Post-FTX reforms in the cryptocurrency industry

There is often a silver lining with black swan events. A black swan event is one that is impossible to predict and has severe consequences. In the wake of the FTX and Alameda Research scam, several things have gained momentum, and the industry has focused on getting itself regulated. Across the world, regulators and crypto firms have worked collaboratively and consciously to protect investors.

The following are some notable developments in the crypto industry post the FTX crisis:

Increased regulation: Governments worldwide have started to develop and implement comprehensive regulations for the crypto industry. These regulations would focus on protecting investors and preventing fraud.
Transparency: Cryptocurrency exchanges have come forward and offered transparency around their operations and financial condition through proper documentation and risk management practices. This helps investors make informed decisions about where to invest their money.
Audits: Cryptocurrency exchanges are being regularly audited by independent auditors. This helps to ensure that the exchanges are operating honestly and that customer funds are safe.

Investors also need to be vigilant and do their own research before participating in any cryptocurrency exchange-related activities. Investors should look for exchanges that are regulated, transparent and have a good reputation.

Politics

US DOJ could still pursue money laundering, sanctions charges against Roman Storm

Published

1 hour ago

August 7, 2025

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US DOJ could still pursue money laundering, sanctions charges against Roman Storm

Roman Storm’s trial verdict leaves the door open for US prosecutors to retry the Tornado Cash developer, attorneys said.

Politics

Diane’s husband was killed by a reckless driver – the wait for justice was almost as painful

Published

1 hour ago

August 7, 2025

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Diane's husband was killed by a reckless driver - the wait for justice was almost as painful

Diane Gall’s husband, Martyn, had been out on a morning bike ride with his friends on their usual route one winter morning in November 2020 – when he was killed by a reckless driver.

Diane and her daughters had to wait almost three years for her husband’s case to be heard in court.

The case was postponed three times, often without warning.

“You just honestly lose faith in the system,” she says.

“You feel there’s a system there that should be there to help and protect victims, to be victims’ voices, but the constant delays really take their toll on individuals and us as a family.”

The first trial date in April 2022 was cancelled on the day and pushed four months later.

The day before the new date, the family were told it wasn’t going ahead due to the barristers’ strike.

It was moved to November 2022, then postponed again, before eventually being heard in June the following year.

“You’re building yourself up for all these dates, preparing yourself for what you’re going to hear, reliving everything that has happened, and it’s retraumatising,” says Diane.

‘Radical’ reform needed

Diane’s wait for justice gives us an insight into what thousands of victims and their families are battling every day in a court system cracking under the weight of a record-high backlog.

There are 76,957 cases waiting to be heard in Crown Courts across England and Wales, as of the end of March 2025.

To relieve pressure on the system, an independent review by Sir Brian Leveson last month made a number of recommendations – including creating a new division of the Crown Court known as an intermediate court, made up of a judge and two magistrates, and allowing defendants to choose to be tried by judge alone.

He said only “radical” reform would have an impact.

But according to exclusive data collected for Sky News by the Law Society, there is strong scepticism among the industry about some proposed plans.

Before the review was published, we asked 545 criminal lawyers about the idea of a new tier to the Crown Court – 60% of them told us a type of Intermediate Court was unlikely to reduce the backlog.

“It’s moving a problem from one place to another, like moving the deck chairs on the Titanic. It’s not going to do anything,” says Stuart Nolan, chair of the Law Society’s criminal law committee.

“I think the problem with it is lack of resources or lack of will to give the proper resources.

“You can say we need more staff, but they’re not just any staff, they are people with experience and training, and that doesn’t come quickly or cheap.”

Instead, the lawyers told us creating an additional court would harm the quality of justice.

Chloe Jay, senior partner at Shentons Solicitors, agrees the quality of justice will be impacted by a new court division that could sit without a jury for some offences.

She says: “The beauty of the Crown Court is that you have two separate bodies, one deciding the facts and one deciding law.

“So the jury doesn’t hear the legal arguments about what evidence should be excluded, whether something should be considered as part of the trial, and that’s what really gives you that really good, sound quality of justice, because you haven’t got one person making all the decisions together.

“Potentially in an intermediate court, that is what will happen. The same three people will hear those legal arguments and make the finding of guilt or innocence.”

The most striking finding from the survey is that 73% of criminal lawyers surveyed are worried about offences no longer sitting in front of a jury.

Casey Jenkins, president of London Criminal Court Solicitors’ Association, says this could create unconscious bias.

“There’s a real risk that people from minority backgrounds are negatively impacted by having a trial by a judge and not a jury of their peers who may have the same or similar social background to them,” she says.

“A jury trial is protection against professional judicial decisions by the state. It’s a fundamental right that can be invoked.”

Instead of moving some offences to a new Crown Court tier, our survey suggests criminal lawyers would be more in favour of moving cases to the magistrates instead.

Under the Leveson proposals, trials for offences such as dangerous driving, possessing an offensive weapon and theft could be moved out of the Crown Courts.

‘Catastrophic consequences’

Richard Atkinson, president of the Law Society, says fixing the system will only work with fair funding.

“It’s as important as the NHS, it’s as important as the education system,” he says. “If it crumbles, there will be catastrophic consequences.”

Ms Jenkins agrees that for too long the system has been allowed to fail.

“Everyone deserves justice, this is just not the answer,” she says.

“It’s just the wrong solution to a problem that was caused by chronic, long-term under-investment in the criminal justice system, which is a vital public service.

“The only way to ensure that there’s timely and fair justice for everybody is to invest in all parts of the system from the bottom up: local services, probation, restorative justice, more funding for lawyers so we can give early advice, more funding for the police so that cases are better prepared.”

Government vows ‘bold and ambitious reform’

In response to Sky News’ findings, the minister for courts and legal services, Sarah Sackman KC MP, told Sky News: “We inherited a record and rising court backlog, leaving many victims facing unacceptable delays to see justice done.

“We’ve already boosted funding in our courts system, but the only way out of this crisis is bold and ambitious reform. That is why we are carefully considering Sir Brian’s bold recommendations for long-term change.

“I won’t hesitate to do whatever needs to be done for the benefit of victims.”

The driver that killed Diane’s husband was eventually convicted. She wants those making decisions about the court system to remember those impacted the most in every case.

Every victim and every family.

“You do just feel like a cog in a big wheel that’s out of your control,” she says. “Because you know justice delayed is justice denied.”