Information Flow in the FTX Bankruptcy: A Network Approach

ArXiv ID: 2407.12683 “View on arXiv”

Authors: Unknown

Abstract

This paper investigates the cryptocurrency network of the FTX exchange during the collapse of its native token, FTT, to understand how network structures adapt to significant financial disruptions, by exploiting vertex centrality measures. Using proprietary data on the transactional relationships between various cryptocurrencies, we construct the filtered correlation matrix to identify the most significant relations in the FTX and Binance markets. By using suitable centrality measures - closeness and information centrality - we assess network stability during FTX’s bankruptcy. The findings document the appropriateness of such vertex centralities in understanding the resilience and vulnerabilities of financial networks. By tracking the changes in centrality values before and during the FTX crisis, this study provides useful insights into the structural dynamics of the cryptocurrency market. Results reveal how different cryptocurrencies experienced shifts in their network roles due to the crisis. Moreover, our findings highlight the interconnectedness of cryptocurrency markets and how the failure of a single entity can lead to widespread repercussions that destabilize other nodes of the network.

Keywords: Network Centrality, Filtered Correlation Matrix, Graph Theory, Market Structure, Systemic Risk, Cryptocurrencies

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail
• Why: The paper employs advanced network mathematics like centrality measures (closeness, information) and filtered correlation matrices, reflecting high mathematical complexity, and uses proprietary transactional data with time-series analysis and network construction methods, indicating strong empirical rigor.

  flowchart TD
    A["Research Goal:<br>How does FTX collapse impact<br>cryptocurrency network structure?"] --> B["Input Data:<br>Transactional relationships between<br>cryptocurrencies in FTX/Binance markets"]
    B --> C["Methodology:<br>Construct Filtered Correlation Matrix<br>to identify significant relations"]
    C --> D["Computation:<br>Calculate Vertex Centrality Measures<br>(Closeness & Information Centrality)"]
    D --> E{"Analysis Period"}
    E -->|Pre-Crisis| F["Establish Baseline Network Stability"]
    E -->|During Crisis| G["Assess Network Adaptation & Vulnerability"]
    F --> H["Key Findings:<br>1. Centrality measures effectively gauge systemic risk<br>2. Crypto markets are highly interconnected<br>3. Single entity failure causes widespread destabilization<br>4. Cryptocurrencies shift network roles during crises"]
    G --> H