The precipitous decline and then bankruptcy last week of FTX, the world’s second-largest crypto exchange, is the biggest shock to the world’s crypto ecosystem since the collapse of the Terra-Luna stablecoin in May. It also serves as a reminder of how accident-prone the nascent industry continues to be. Although more details will emerge from the bankruptcy proceedings now under way, news reports and interviews with insiders indicate that the collapse of FTX had its origins in its links with a sister crypto trading firm called Alameda Research, to which it secretly transferred customer funds that were used for speculation. A lot of the assets on Alameda’s balance sheet included FTX’s own token, called FTT, which the company sought to use as collateral for loans. Substantial sales of FTT by one of its biggest holders, Binance, triggered the equivalent of a bank run. Unable to meet the redemption calls, Alameda was thus forced into bankruptcy, together with FTX.

The debacle has rippled across the entire crypto industry. The prices of crypto assets have tanked. Retail investors, whose holdings in FTX are frozen, have lost heavily. Blue-chip institutions such as venture capital firms Sequoia and SoftBank, and hedge fund Tiger Global, as well as Temasek, have each had hundreds of millions of dollars worth of investments in FTX wiped out. There will also be contagion. FTX had investments in more than 200 companies that maintained much of their assets on FTX. Several lenders, which hold now worthless FTT as collateral, will also be impaired.