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How investors can detect an FTX-like risk event early – A TRaiCE case study

Even by the see-saw standards of the cryptocurrency world, the FTX bankruptcy happened shockingly quickly. The company went from being a cryptocurrency poster child to becoming an industry precautionary tale in just 10 days. The bankruptcy blindsided investors, most of whom had to write off millions of investment dollars. This seemingly out-of-the-blue risk event resulted from some very lax due diligence and a failure to detect crucial red flags in time. As such, the FTX collapse serves as a harsh reminder of the importance of ongoing risk monitoring for lenders and investors. This case study takes a brief look at the FTX debacle and demonstrates the utility of using AI-driven platforms such as TRaiCE that help you detect risk early.

The FTX symbol inside a computer screen and a man wearing a TRaiCE T shirt holding a lens over it with a downward bar graph in the background
The FTX collapse was preceded by several warning signs

The collapse of a cryptocurrency giant

Established in 2019, FTX quickly became the darling of the crypto space. The company was spearheaded by altruistic wunderkind Sam Bankman-Fried who pledged to give away a majority of his wealth. His philanthropy and simplistic lifestyle won him and his company accolades and celebrity endorsements. And for a while, it seemed like the corporation could do no wrong. In just 3 years, it became one of the world's largest cryptocurrency exchanges. At its peak, it had a $32 billion valuation, over 1 million registered users, and average daily transaction volumes of over $10 billion.

But all was not well in crypto-paradise. Underneath the surface, was a shaky foundation of loose corporate governance, undisclosed financial leverage, solvency issues, and a tangled web of concerning company interconnections. The latter, in particular, turned out to be the loose thread that led to the company’s eventual unraveling. It all started with a news scoop that revealed a too-close-for-comfort connection between FTX and its sister company Alameda Research, a cryptocurrency trading firm. As it turns out, most of Alameda Research’s financial foundation was based on the FTX token (FTT), a dangerous concentration of risk and conflict of interest. One thing led to another and the company collapsed as droves of spooked traders and customers attempted to sell off their FTT tokens all at once, sparking a liquidity crisis.

Missed warning signs

Despite the seeming suddenness of the FTX collapse, the crisis was not without its share of warning signs. For one, FTX did not have a transparent company structure or formal executive board. For another, concerns about the company’s potential conflicts of interest and oversized role in the virtual currency sector had been swirling for a while. Several financial veterans sounded the alarm months before the crisis unfolded and a Bloomberg article in September even spelled out these concerns in some detail. So, there were red flags. And if investors had picked up on these, they could have seen the risk event coming from a mile away.

What the TRaiCE Digital Risk Index showed

The TRaiCE Digital Risk Index is a proprietary risk score that denotes how risk-prone a business is. It is calculated using online data, sentiment trends, and available financial information. In FTX’s case, the TRaiCE algorithms picked up on a steady decline in online sentiment towards the company from March 2022 onwards with a particularly harsh drop in September, 2 months before the implosion, as shown below.

Now every business experiences ups and downs in sentiment. But when the dip is a prolonged one, as was the case with FTX, it is time to sit up and take notice.

Herein lies the utility of using TRaiCE. With its AI-powered processes, the platform picks up news articles, social media posts, customer reviews, and business reports mentioning a company or its associated key personnel from the vast digital world. It does this on a daily basis ensuring that financiers never miss out on changes to business fortunes. It also helps investors stay informed on conversations around their counterparties, giving them up-to-date data, that in combination with financial metrics, can be used to make informed business decisions.

With regard to FTX, the steady decline in its TRaiCE Digital Risk Index scores for over 3 months should have alerted investors to take a closer look at the company’s financial underbelly and derisk before the liquidity crisis hit.


Only time will reveal the full impact of the FTX bankruptcy. What is clear, however, is that this will not be the last time a crisis like this hits. Given this, financiers need to put systems and processes in place that can detect such risk scenarios early. And that’s exactly what the TRaiCE system does. The platform allows lenders and investors to monitor entire portfolios daily and comprehensively with features such as red flag alerts, sentiment trends, and risk projections for the next 3 to 6 months. If you are looking to bolster your risk monitoring efforts, why not try out these features for yourself using our 2-week free trial offer today?


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