What is a bank run, actually? And is that really what killed FTX? - Episode 317 - by cryptohunt.it

What is a bank run, actually? And is that really what killed FTX?

Welcome to the Cryptohunt Jam, where we spend one minute a day explaining crypto. In plain English - and this is another special to explain what happened at FTX and if we can avoid it.

In the aftermath of FTX, many people have compared what happened to FTX to what they call a "bank run". So, what is a “bank run”, and is that actually what happened? Stay tuned, the answer may surprise you.

Imagine you are inviting people over to your house to watch the world cup finale together. Argentina vs. France - of course it ends up being packed in your living room.

You've decided to serve snacks and put out a big bowl of chips. But the match is such a nail biter that your friends are going through all of them before the first team even scores. You have enough to feed everyone, but the rest are in your basement behind some stuff. You go downstairs, dig around, and eventually, a good 25 minutes later, you are able to fill up the bowl. Not ideal, but it all worked out in the end.

That's what happens in a bank run as well. People, often in situations where they worry that their money may not be safe, rush to withdraw it from their bank. Meanwhile the bank, which didn't expect this to happen, has parked a part of the money somewhere else - some in investments, some simply in savings accounts they can't access in that very moment. The problem: For a short time, the bank is out of actual money it can hand out and needs a while to catch up by converting those parked funds back. Also - not ideal, but the money was still there.

But is this really what happened to FTX? No.

It is true that, once the news of problems at FTX emerged, people rushed to withdraw their funds. The problem was that FTX hadn't simply parked it somewhere else like a bank would. Instead, Sam Bankman-Fried and his gang took it without customer’s permission and gambled it away, betting billions while crypto was crashing. It's as if you went to the basement to get those bags of chips and discover that the rats got in and ate them all.

And there we have the big difference between banks and crypto companies like FTX: Banks are regulated and have strict rules and oversight, especially since 2008 when they caused the banking crash and lawmakers put safeguards in place. In all fairness it should be said that banks can gamble, too. But only a little and not secretly.

This means: Right now, your crypto just isn't safe with crypto exchanges, especially those overseas. Who knows what they are up to. And with that in mind, we'll take a closer look at the largest one of them: Binance, because trouble may be on the horizon there too.

See you next time to investigate: Is Binance the next FTX?

This podcast is produced by Cryptohunt.it, the easiest place to learn crypto. Copywriting is done by Arndt Voges, Social Media is done by Brett Holleman, design is done by Carmen Rincon, and my name is Christian Byza, Co-Founder of Cryptohunt and I am your host of this daily show.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.