Last week, Bitcoin prices took a hit, tumbling down to a fresh 52-week low of $15,554:
Now, you’d be forgiven for not thinking much of this blip. After all, Bitcoin prices have already been in freefall for the past several months, having shed over 70% of its value since this time last year. This time, Bitcoin’s price drop had nothing to do with macroeconomic forces like geopolitical issues or rising inflation. Instead, what happened was strikingly similar to an event earlier this summer that shaved $10k off Bitcoin prices…
FTX Gets F*Xed
Crypto exchange FTX, founded in 2019 by MIT graduate Sam Bankman-Fried, was formerly the third-largest crypto exchange by volume in the world. Alongside respectable peers like Binance and Coinbase, FTX was held up as a prime example of the glowing future of crypto. With Bankman-Fried at the helm, who was lauded as a crypto genius, FTX led the push to bring crypto to the masses.
- The company spent millions on marketing, with superstar athletes like Tom Brady and Stephen Curry acting as brand ambassadors.
- They took out an ad spot at this year’s Super Bowl, sponsored both traditional sports and esports organizations alike, and even donated heavily to politicians and lawmakers.
But it all started tumbling down for FTX, formerly the “cleanest brand in crypto”, two weeks ago. On November 2nd, a leaked balance sheet from FTX’s sister company, a crypto trading firm named Alameda Research was published by the crypto news site CoinDesk. Alameda Research, which had also been found by Bankman-Fried, had an unusually close relationship with FTX. What CoinDesk reported, however, was just how closely intertwined the two companies were.
- According to the leaked balanced sheet, 40% of Alameda’s $14.6 billion in assets were held in FTX’s own crypto token, known as FTT.
Having such a large portion of its assets tied to FTX’s illiquid token raised many questions in people’s minds about the true nature of the relationship between Alameda and FTX, as well as their financial stability.
Laws of Power: Crush Your Enemy Completely
One person that realized this was Changpeng Zhao, CEO, and co-founder of Binance. He tweeted just four days later that Binance would be selling all of their remaining holdings of FTT.
Though Alameda’s CEO quickly replied, offering to buy Binance’s FTT tokens for $22 each to minimize market impact, the damage was already done. Panic cascaded through the industry, and the selloff began. By early last Tuesday, the 8th of November, FTT would fall from $25 to below $10, and FTX customers started a bank run to withdraw money from their accounts. This would lead to a liquidity crunch at both FTX and Alameda, and Bankman-Fried, realizing things were rapidly spiraling out of his control, reached out for help.
The Plot Thickens
Thanks to Bankman-Fried’s efforts, Binance offered to buy out FTX later that same day after some initial negotiations, subject to due diligence… But it would only take one day’s worth of due diligence for Binance to walk away from that deal, citing “mishandled customer funds and alleged U.S. agency investigations.” As it turns out, there was much more to this story than just poorly diversified, illiquid assets and a cash crunch. Both the U.S. Securities and Exchange Commission, as well as the Justice Department, would join forces to launch an investigation into whether or not customer assets were handled appropriately. They also investigated whether or not some of FTX’s offered products should actually have been registered as securities with the SEC.
- It came to light that FTX had been loaning billions of its customers’ funds to Alameda to fund the latter’s investments, against FTX’s own terms of service.
- On top of this, Alameda was also accused of frontrunning FTX clients by amassing tokens before they were listed on FTX – a form of insider trading.
With Binance outright stating that FTX’s issues were “beyond our control or ability to help”, things swiftly collapsed from there. On November 10th, last Thursday, Bankman-Fried announced that Alameda was being wound down, with the intention of repaying all of FTX’s customers and other liabilities. All the while FTX’s assets were frozen by regulators in the Bahamas where the company is based. To cap it all off, on Friday the 11th, Alameda, FTX, and their affiliated entities filed for Chapter 11 bankruptcy. And as if that weren’t enough, later that same day FTX was hacked, possibly costing the exchange $473 million in crypto assets – the icing on the cake.
The Treasury and the SEC Have to Regulate
As of the time of writing, the FTT token has fallen by over 90%, evaporating nearly $3 billion in market value:
Earlier this year, there was a spate of similar bankruptcies. In the wake of the Terra/Luna failure mentioned earlier, which single-handedly caused Bitcoin to fall from $40k to $30k… There were also the crypto lenders Celsius and Voyager, and hedge fund Three Arrows Capital, which went bankrupt during the fallout.
- [In fact, Voyager had just recently come to an agreement with FTX for the latter to buy out Voyager’s remaining assets – but now they’ll need to find a new buyer.]
The Lehman Moment for this Generation
- This is unique for tens of millions of new investors who just had the rug pulled from underneath them – experiencing their own Enron or Lehman Moment.
As an industry leader, Bankman-Fried had previously been leading lobbying efforts to shape the future of crypto regulation in the U.S. Just one month earlier, he had penned a set of possible Digital Asset Industry Standards in which he espoused an FTX-friendly regulatory framework. In fact, last December, Bankman-Fried had testified before the House Committee on Financial Services, chaired by congresswoman Maxine Waters, on the future of digital assets and finance. To quote Bankman-Fried directly from that hearing:
- “To be sure, there are irresponsible actors in the digital-asset industry, and those actors attract the headlines, but FTX is not one of them…”
I’m sure you got a good chuckle out of that. But my point isn’t the irony in that statement, though it’s not lost on me. What does it mean if the third-largest exchange in the world… Led by one of the most well-respected figures in the industry… Who’s considered trustworthy enough to inform government policy – can turn out to be a massive fraud, and even get hacked for half a billion dollars? It means that legislators and regulators still have a lot of work to do when it comes to protecting customers and investors. The fact of the matter is, it’s very much still the Wild West in the crypto markets these days, despite what you might otherwise be led to believe. And until the government manages to figure things out, the only person you can 100% count on to protect yourself in the crypto markets – is you. Cold storage folks—or you will be Bankman-Fried. Regards, Marin
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