Bank man fried! Cautious investors LOL as USD32 billion crypto asset (sic) crashes
The multi-billion-dollar bankruptcy filing of Bahamas-based cryptocurrency exchange, FTX, has caused ripples across the crypto asset community as individual investors assess the damage to their wallets, and various crypto-based and decentralised finance (Defi) projects take a long, hard look at their long-term sustainability. FTX’s end game sent sections of the global cryptocurrency market into freefall, prompting the expected chorus of “I told you so” from the crypto haters. This “I told you so” refrain is quite common following a significant financial market collapse, with judgement given with scant consideration for fact.
Facts should precede condemnation, always
For this writer, the biggest surprise following the FTX collapse, is the level of surprise expressed by investors and market commentators alike, followed by the speed with which the lunatic fringe began condemning all opportunities in the broader crypto and Defi universes. “FTX has collapsed and cryptocurrencies like Bitcoin and Ethereum are worth about as much as the bits and bytes they were conjured up from” screams the mob, with no regard for the back story. This article offers a brief history of FTX, from its start to its likely end, before laying bare some of the ‘red flags’ that should have sent investors scattering for cover, from day one.
FTX was the brainchild of its founder and CEO Sam Bankman-Fried (yes, ironically bank man fried) who started the cryptocurrency exchange at the tender age of 28. Just three years post-launch, the firm was reportedly worth USD32 billion, with its founder claiming a staggering 50% of that amount, or USD16 billion. Readers should note that the FTX-issued token, called FTT reached a peak market capitalisation of around USD9 billion in October 2021, though it had fallen to around USD3.4 billion by end-October 2022. That is when, as the saying goes, all hell broke loose. PS: FTX’s valuation and the market capitalisation of the coin are not one and the same.
Market commentators have since singled out a CoinDesk report, published 2 November 2022, as the trigger for FTX’s incredible fall from grace. In keeping with the phrase “easy come, easy go” the token’s market capitalisation dropped to under USD300 million, or as close to zero as makes no difference, over a 10-day period starting 2 November 2022. The token still trades, for now, but the company FTX has gone to the wall.
The biggest red flag in financial services
CoinDesk had drawn attention to one of the biggest ‘red flags’ that can be raised over a financial services business, namely conflict of interest. They pointed out that a trading firm called Alameda Research, which just happened to be run by Bankman-Fried, had a USD5 billion position in FTT, a token issued by FTX. Being long cryptocurrencies between January 2022 and October 2022, a period during which the global cryptocurrency market shrank by half, reportedly created massive liquidity and solvency concerns at Alameda, which position was exacerbated by all of Alameda’s Investment Foundation’s ‘cash’ being tied up in FTT too.
The CoinDesk report caused what everyday investors know as a ‘run on the bank’. You know the scenario, dear reader, when a bank’s solvency comes under question, its depositors quickly show up at the door to close their accounts and withdraw their funds… In much the same ways, investors who held the FTT token rushed to FTX to convert that token into fiat currency, such as dollars, or failing that into a more credible cryptocurrency such as Bitcoin or Ethereum. Binance, one of the major global cryptocurrency exchanges was leading the charge, seeking to unload around USD529 million in FTT tokens, with ordinary investors shaking fistfuls of the tokens valued at another USD6 billion pre-collapse. This selling pressure sent the token, which incidentally had no fiat currency or mainstream cryptocurrency underpin, 80% lower.
To expand on the analogy, you can think of FTX as a bank that issued is own currency, the FTT… Depositors at FTX used hard currency like dollars, euro, pounds and yen to snap up FTT tokens and participate in various trading activities the FTX cryptocurrency platform. The trouble is, when these investors started a ‘run on FTX’ there was no hard currency to refund them, only worthless FTT tokens. This writer firmly believes that many cryptocurrency start-ups are controlling the value of their ‘personal’ tokens and manipulating supply demand to keep a false, high valuation; but when something untoward happens they cannot maintain the balance and a collapse becomes inevitable. Thus, the second ‘red flag’… issuers are creating manipulating supply and demand of tokens with no tangible value.
So, what happened to all that cold, hard cash?
Investors are often amazed at how firms like FTX go belly up despite having ‘soaked up’ billions in hard currency. How quickly they forget that the personalities that front these businesses are egomaniacal narcissists with insatiable spending habits… How else do you explain FTX’s aggressive marketing expenditure which reportedly included a US Super Bowl advertising campaign and the purchase of naming rights to the home of the Miami Heat basketball team. Here is the recipe for those who missed it: take depositors’ dollars, convert them into FTT tokens with an exchange rate that you are largely able to control, withdraw those dollars and spend at will. Bankman-Fried did exactly that, also using around USD1 billion to bail out various cryptocurrency over 2022.
No surprise then, that on 11 November 2022, FTX filed for chapter 11 bankruptcy, bringing around 130 affiliated crypto firms into the proverbial net… And the LOL moment for this article, in the filing, the firm revealed it has assets of between USD10 and USD50 billion, and liabilities in the same range. WTH; how is it possible for a firm to operate with such huge guestimate variances in its assets and liabilities. Cryptocurrency volatility, we understand, but surely… After the collapse, FTX’s valuation plummeted, as did its founder’s net worth. And investors have been left scurrying to see if there are any avenues to recover some of their money.
Within days, as reported by Nathan Reiff, in an article on Investopedia.com, a class-action lawsuit was filed in a Florida federal court, “alleging that Sam Bankman-Fried created a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors from across the country”. One question worth exploring is how much money has actually gone up in smoke. To phrase it differently, if you start with zero and create an artificially inflated asset worth USD32 billion over just three years, and it falls to zero from there, have you lost anything? Bankman-Fried will experience this loss as a return to his prior state, but individual investors are less lucky. They have essentially donated some of their hard-earned cash to fund FTX and its alter ego, Bankman-Fried, based on his valuation say-so… Hmmm… Now that the name has repeated a few times in this text, the name ‘bank man fried’ sounds almost made up. Comedians are going to have an absolute field day!
FTX to crypto assets as Steinhoff to equity markets
“The broader consequences of the FTX fiasco for the cryptocurrency industry will take time to unfold,” writes Reiff. “As the largest collapse in the short history of cryptocurrencies, FTX may further deter investors, who are already cautious because of concerns about stability and security”. Most commentators also point to increased regulatory scrutiny following this debacle, with the U.S. Securities and Exchange Commission and other regulators likely to step in with new laws governing digital tokens and exchanges.
To conclude, as with many similar scams and schemes, we must refrain from blurring the lines between corrupt or criminal actors; maverick financiers who simply overstep the bounds of rationality; well-intentioned founders whose sandcastles come crashing down when the tide comes in; and the section of the market built on sound foundations, owned and operated by ethical individuals. What this writer is trying to impart, is that Steinhoff did not cast all listed equities in poor light, just as FTX should not taint all cryptocurrencies and crypto asse
