Venture capital firm Sequoia Capital has written off its investment in the demised crypto brokerage firm FTX shortly after the company’s assets were frozen by authorities in the Bahamas – the legal domicile of the firm founder by Sam Bankman-Fried.
According to a note the firm sent to investors and published on its official Twitter account, Sequoia stated that FTX is facing solvency risks amid a liquidity crunch but emphasized that they do not yet understand the full extent and nature of the company’s situation.
Here is the note we sent to our LPs in GGFIII regarding FTX. pic.twitter.com/Cgp1Yxk1pz
— Sequoia Capital (@sequoia) November 10, 2022
The American investment firm disclosed that a $150 million investment made by its Global Growth Fund III accounted for less than 3% of the fund’s total assets under management and the impact on its performance was minimal.
Moreover, the SCGE Fund of Sequoia invested another $63.5 million in the firm founded by Bankman-Fried representing less than 1% of the assets held by this vehicle by the end of September 2022.
These Events Led to the Collapse of FTX
The unexpected collapse of FTX has been the latest incident to rattle the crypto community. It is still relatively unclear how the firm got to this point considering that it has been raising capital at increasingly higher valuations for multiple investors in the past few years.
In January this year, FTX raised $400 million from investors during a Series C round that valued the crypto firm at an eye-popping $32 billion.
Sources cited in a Wall Street Journal report commented that the founder of the exchange was seeking to shore up the firm’s finances with a capital injection of $8 billion as it has been receiving a big wave of withdrawals following news about the company’s weakness.
A report from CoinDesk published last week stated that prop trading firm of FTX – Alameda Research – reportedly invested a third of its assets into the company’s native digital asset – the FTT token.
Since that article came out, the price of FTT has dropped from around $25 per coin to as little as $3.5 as investors now fear that Bankman-Fried’s prop trading firm has been manipulating the price of the digital asset to make it seem as if it was performing better than other cryptocurrencies despite the crypto winter.
Before the report came out, the FTT token had only lost around 30% of its value since the year started compared to the 50% or higher losses that other assets in the ecosystem had experienced during this same period.
The close relationship between Alameda and FTX may have been the cause of instability for FTX as the fund may have incurred sizable losses as a result of the latest meltdown the crypto market has experienced.
In addition, the decline in the value of the FTT token may have pushed the firm’s finances off a cliff as a third of its assets – if the CoinDesk report is accurate – have nearly evaporated.
Another big concern within the investment community is that FTX may have been using customers’ funds to make bets via its prop trading arm Alameda. The lack of regulatory oversight in the crypto industry could have facilitated these activities as companies like FTX are based overseas in countries with lax financial regulations.
Bankman-Fried Addresses Concerns in Long Twitter Thread
1) I'm sorry. That's the biggest thing.
I fucked up, and should have done better.
— SBF (@SBF_FTX) November 10, 2022
In a long Twitter thread, Bankman-Fried addressed some of these concerns as he announced that Alameda was winding down its trading activities and it will soon suspend its dealings with FTT.
According to SBF – as he is also known – the prop trading arm was not doing any of the “weird things” some reports have mentioned and its operations were “nothing large at all”.
SBF assured customers that the company’s top priority at the moment is to make them whole and to clear the withdrawal backlog by any means necessary via liquidity injections from third parties.
A deal proposed by FTX’s rival Binance eventually blew up shortly after the company headed by Changpeng Zhao started to conduct its due diligence on the demised crypto exchange.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com”, Binance stated.
Other Related Articles: