Crypto’s Icarus moment
A chaotic week in crypto… what’s new, you might ask?
Well, over the past few days, events took an ultra chaotic turn when a run on FTX, a crypto exchange, created a fire sale that looked like it could burn down the entire ecosystem.
So, what caused the chaos? Is it an isolated incident or an existential threat? And what might the future hold?
A run on the exchange
Shockwaves were sent through the digital assets sector this week when FTX, a business valued at $32bn following Softbank investment in January, collapsed. Rumours had been swirling about FTX’s solvency for some time and these bubbled to the surface on Monday, causing a surge in withdrawals ($6bn in 3 days) and a "liquidity crunch" as FTX’s coin, FTT, plunged +90%.
Seemingly riding to save the day on Monday, Binance, one of FTX’s peers and an early investor in the company, agreed to buy its non-US unit. But by Tuesday, the deal had fallen through with Binance saying it had significant concerns, releasing a statement that read: “the issues are beyond our control or ability to help.” That didn’t read well, and it led to panic ripping through the crypto sector and all coin prices were sent plummeting, with BTC crashing to a two-year low.
At time of writing, it sounds like the end of FTX, with Sequoia, an early backer, writing its $214 million investment down to zero. Even more concerning is what it means for the wider crypto ecosystem. If one of the biggest exchanges can go belly up in a matter of days, why should the system be trusted? And how has the cryptosphere got itself into such an almighty mess?
“The next Warren Buffet”
FTX founder and CEO, Sam Bankman-Fried (SBF, as he’s known) has been hailed as the next Warren Buffet for his investing prowess and the next JP Morgan for the way he bailed out failing crypto outfits this summer. His meteoric rise rocketed him out of near obscurity as he built one of the biggest, fastest fortunes in history. The majority of it has now gone up in smoke. How?
When reading this week about the chaos, I found this interview with short seller Marc Cahodes, who smelt a rat about FTX a long time ago. It’s an incredible takedown of FTX and SBF (watch from 34:40 for the good stuff). There are some staggering takeouts, including my favourite: “none of these people could run a lemonade stand, let alone an exchange.”
This thread from the Head of R&D at Coinmetrics also does a good job unearthing why the FTX story never added up. The FTX team were unknown before. The head of regulation was involved in a scandal with an online poker company. FTX’s sister company, a fund, Alameda Research, lost money this year and needed a bail out by FTX, who provided liquidity with its token, aka customer funds. None of these events made sense. The writing was on the wall.
Tragically inevitable
In the rearview, you see the events of the past week, which look like chaos and tragedy, were, largely, inevitable. Maybe that’s what Binance CEO, CZ, worked out, seeing an opportunity to squeeze a competitor by dumping their token, crashing the price and swooping in to buy?
Given how Binance are now out of the deal, it’s likely that the game is up for FTX and SBF. I’d bet there is also more going on (and by “more” I mean, nothing good) below the surface. Why is FTX based in the Bahamas? Who is its real co-founder? Why did they throw $6.5m at Tom Brady to appear in a Super Bowl ad? Why did they sponsor the Miami Heat’s arena? The list of (at best) questionable activities is endless. A book will be written and a film made about this era of excess – our children will likely laugh at why we ever believed so much of it to be real!
An interesting, no, weird aside about SBF is that he has given $40m to the Democratic Party and is a proponent of “effective altruism”, which, “uses evidence to find the best ways of doing good.” The main premise sounds nice. But SBF’s manifestation is that he should make as much money as possible so that he can give it away. To me, that’s a non sequitur, with the logical link tenuous at best. FTX makes money as a crypto exchange where trading is zero sum, so he makes his fortune from, largely, retail punters. As we’re discovering, SBF’s source of wealth – wealth he chose to use to push democracy and altruism – came from people who could least afford to lose it in the first place.
Whatever next
Chaos reigns, so it’s too early to write conclusions about the wider ecosystem’s future. But this is the week all crypto fans feared. Critics have forever claimed it’s a system built by a few brainy kids who used the mountain of excess capital in the system to pump up valuations and buy lifestyles that were unsustainable. When liquidity dried up, the collapse of a business like FTX was always on the cards. The music has stopped. The party is over. Home time, children.
The story smacks of Wirecard and Theranos: Obscure companies with charismatic founders emerging from nowhere to ride the zeitgeist in an era of cheap money, making millions for themselves which they lifted from the wallets of the Everyman. SBF seems to be the next tech-enabled-Icarus, with greed, hubris and stupidity, from a broad range of market participants, including seasoned investors who should know better, allowing these young founders to fly high before crashing and burning having flown too close to the sun.
Whether its the system that’s ruined, or whether FTX is just one bad apple in a nascent industry (like Theranos in med-tech, Wirecard in fintech), remains to be seen. Only time will tell and the crypto story is far from over – but it hasn’t been a good week for SBF or any fan of crypto.
