The Alameda gap and crypto liquidity crisis explained

Published

2 years ago

November 7, 2023

admin

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

‘We’re a team’: Jess Phillips defends PM’s decision to suspend Labour rebels

Published

58 mins ago

July 17, 2025

admin

Starmer suspends four Labour MPs for breaches of party discipline

A minister has defended Sir Keir Starmer’s decision to discipline rebellious MPs, saying they would have used “stronger” language against those who are “continually causing trouble”.

Home Office minister Jess Phillips told Sky News’ Matt Barbet that Labour MPs were elected “as a team under a banner and under a manifesto” and could “expect” to face disciplinary action if they did not vote with the government.

It comes after the prime minister drew criticism for suspending four Labour MPs who voted against the government on its flagship welfare bill earlier this month, while stripping a further three of their roles as trade envoys.

Politics latest: PM to welcome German chancellor

Brian Leishman, Chris Hinchliff, Neil Duncan-Jordan and Rachael Maskell all lost the whip, meaning they are no longer part of Labour’s parliamentary party and will sit as independent MPs.

Labour backbenchers lined up to criticise the move last night, arguing it was a “terrible look” that made “a Reform government much more likely”.

But speaking to Sky News, Ms Phillips said: “We were elected as a team under a banner and under a manifesto, and we have to seek to work together, and if you are acting in a manner that is to undermine the ability of the government to deliver those things, I don’t know what you expect.

“Now I speak out against things I do not like, both internally and sometimes externally, all the time.

“There is a manner of doing that, that is the right way to go about it. And sometimes you feel forced to rebel and vote against.”

Referring to a description of the rebels by an unnamed source in The Times, she said: “I didn’t call it persistent knob-headery, but that’s the way that it’s been termed by some.”

She said she would have described it as “something much more sweary” because “we are a team, and we have to act as a team in order to achieve something”.

More than 100 MPs had initially rebelled against the plan to cut personal independent payments (PIP). Ultimately, 47 voted against the bill’s third reading, after it was watered down significantly in the face of defeat.

Three other MPs – who also voted against the government – have had their trade envoy roles removed. They are Rosena Allin Khan, Bell Ribeiro-Addy and Mohammed Yasin.

However, it is understood this was not the only reason behind the decision to reprimand all seven MPs, with sources citing “repeated breaches of party discipline”.

Ms Maskell was one of the lead rebels in the welfare revolt, and has more recently called for a wealth tax to fund the U-turn.

Mr Hinchliff, the MP for North East Hertfordshire, proposed a series of amendments to the flagship planning and infrastructure bill criticising the government’s approach.

Mr Duncan-Jordan, the MP for Poole, led a rebellion against the cut to the winter fuel payments while Alloa and Grangemouth MP Mr Leishman has been critical of the government’s position on Gaza as well as the closing of an oil refinery in his constituency.

Ian Byrne, the Labour MP for Liverpool West Derby, wrote on X on Wednesday that the prime minister’s actions “don’t show strength” and were “damaging Labour’s support and risk rolling out the red carpet for Reform”.

Leeds East MP Richard Burgon added that “challenging policies that harm our communities” would “make a Reform government much more likely”.

Ian Lavery, Labour MP for Blyth and Ashington, warned the suspensions were “a terrible look”.

“Dissatisfaction with the direction the leadership is taking us isn’t confined to the fringes,” he wrote.

Politics

Five reasons to be confused by Starmer’s MP suspensions

Published

3 hours ago

July 17, 2025

admin

Five reasons to be confused by Starmer's MP suspensions

I’m going to level with you – I am very, very confused.

In fact, I’ve got five reasons why I’m very confused.

The first reason I’m confused is because this is meant to be a show of strength, but most people have literally never heard of these four individuals.

Rachael Maskell is a bit well-known, but if this is intended to impress the public, then I’m not sure the public will notice.

Secondly, if it’s about installing discipline in the parliamentary Labour Party, I’m confused about that. Surely Sir Keir Starmer‘s aim right now should be to unite the parliamentary Labour Party rather than divide it.

After the welfare rebellion, the promise was to listen. Starmer gave interviews saying he was going to create policy more sympathetic to his party.

This is the opposite approach.

The third reason I’m confused is because they’ve been suspended in part for their role in the welfare rebellion that forced the government into its U-turn.

It was only yesterday morning that Work and Pensions Secretary Liz Kendall said the government’s welfare reforms were in the “right place” – yet the people who helped get them there are suspended.

Suspended for agreeing with what is now government policy is an odd look.

Fourth, I’m confused at who the most prominent individual to be suspended is – Rachael Maskell.

She was on Sky News within minutes of the suspension looking genuinely surprised and really rather upset.

Now, there’s absolutely no doubt she was a ringleader in this rebellion. Eight days ago, she authored an article in the New Statesman discussing how to organise a government rebellion – so I think that’s pretty much case closed.

But Rachael is of the soft left, not the hard left. And who else is on the soft left? It’s Starmer.

It does feel as if the prime minister is slightly coming for people who have dangerously similar views to him.

I understand this is all about drawing hard lines and showing who’s on your team and who isn’t.

But some of that line looks like it goes awfully close to people that you really wouldn’t want to be on the wrong side of if you’re prime minister.

And finally, three other MPs – Rosena Allin-Khan, Bell Ribeiro-Addy and Mohammed Yasin – have been sacked from their trade envoy jobs. They do retain the party whip.

But here’s the thing that hurts your head: if you are a Lib Dem trade envoy, like Sarah Olney, or if you’re a Tory trade envoy, as George Freeman was until a couple of weeks ago when he was suspended, you do not have to obey the whip – and you can continue to keep your trade envoy role.

But if you’re in the Labour Party and you’re a trade envoy, you do have to obey the whip.

And it’s just one of those mad inconsistencies where if you’re in another party, you can keep your trade envoy role, if you’re in the governing party, you can’t. That just doesn’t make sense at all.

So there are my five reasons why I’m completely confused.