History Repeats: The FTX Collapse

The recent collapse of FTX, one of the world’s most prominent cryptocurrency exchanges, has sent shockwaves throughout the financial and crypto communities. While the downfall’s intricacies and the blockchain backdrop may appear novel, history is replete with analogous financial catastrophes. The recurrent themes of speculation, mismanagement, lack of oversight, and misplaced trust ripple through time, revealing that, in many ways, we’ve seen the FTX collapse before.

The South Sea Bubble of the early 18th century is one of the earliest examples of such financial manias. The South Sea Company, initially a legitimate enterprise with aspirations to monopolize trade with South America, became the center of rampant speculation. Much like FTX, it promised unprecedented returns and attracted investment from all social strata. When reality could not match these speculative heights, the bubble burst, leading to a crisis of confidence that echoed throughout the British financial system.

Similarly, the 1920s witnessed extraordinary enthusiasm for the stock market, culminating in the Wall Street Crash of 1929. The Roaring Twenties’ speculative bonanza mirrored the crypto craze leading to FTX’s rise. Investors, both novice and experienced, threw caution to the wind, drawing parallels to recent crypto traders’ behaviors. Just as with FTX, leverage amplified gains and subsequently losses, precipitating a systemic crisis once the bubble burst.

Another poignant example is the spectacular failure of Enron in 2001, which, like FTX, was a darling of innovation—this time, in the energy trading sector. Enron’s accounting irregularities and conceit bear a resemblance to the alleged mismanagement and misuse of customer funds at FTX. Both entities were once hailed for their revolutionary approaches, only to later become case studies in corporate malfeasance.

Fast forward to the late 2000s, the world was again shaken by a financial calamity during the subprime mortgage crisis, where excessive risk-taking and opaque financial products led to a system-wide meltdown. The crisis was exacerbated by complex derivatives and securitization—elements not dissimilar to today’s intricate crypto financial instruments that have confounded traditional regulators and market participants alike.

The fall of Lehman Brothers in 2008 offers a particularly stark parallel to FTX’s collapse. In both cases, the failure of a single institution revealed a web of vulnerabilities and interdependencies that few had fully appreciated. Lehman’s bankruptcy sent a clear signal that even well-established firms could fail spectacularly, much like FTX’s downfall demonstrated that new financial ecosystems are equally prone to disaster.

Madoff’s Ponzi scheme, discovered in 2008, stands as a testament to the destructive potential of deception and false confidence within the financial sector. Much like the red flags that were overlooked at FTX, Madoff was able to perpetuate his fraud for years, due in part to a collective belief in his supposed investment acumen—until it all unraveled, exposing the emptiness beneath the façade.

The Dot-com Bubble of the 2000s also holds lessons for the FTX saga, particularly in the way it highlights the perils of excess enthusiasm for emerging technologies. Many internet startups then, much like numerous blockchain projects now, were driven more by speculative hype than by sustainable business models, leading to a painful market correction.

MF Global’s 2011 bankruptcy illustrated the hazards of high-risk investments and the thin line between aggressive business strategies and fiscal imprudence. The parallels with FTX are evident, as both organizations partook in risky practices that ultimately betrayed their customers’ and investors’ trust.

The parallels continue with the collapse of the cryptocurrency exchange Mt. Gox in 2014, which at the time handled the majority of Bitcoin transactions. Its failure due to hacking and mismanagement signaled a warning to the nascent crypto industry about security and transparency—a warning that, in the case of FTX, appears not to have been sufficiently heeded.

The Wirecard scandal of 2020, much like FTX, showcased the potential for high-flying fintech companies to engage in fraudulent activities, even under the gaze of regulators and auditors. With the revelation of a missing $2 billion and subsequent insolvency, the Wirecard calamity serves as a contemporary forewarning to the unnatural practices allegedly at play within FTX.

Despite these prior occurrences, each time a new scandal emerges, the sentiment that “this time is different” often prevails—until, inevitably, it is not. The FTX collapse, while shocking, follows a historical pattern of financial euphoria followed by crisis. It serves as a stark reminder of the need for enhanced due diligence, transparent governance, and robust regulatory frameworks to safeguard against the human inclinations that repeatedly steer the financial world toward such precipices.

As the dust settles on the FTX debacle, the onus is on industry stakeholders, regulators, and the broader financial community to scrutinize and learn from these historical parallels. Only by acknowledging that we’ve seen the rise and fall of an FTX before can we strive to prevent the next high-profile financial collapse from catching the world by surprise.