The Shocking Overnight Collapse of FTX
The craziest day in crypto’s history.
Tuesday was the craziest day in crypto’s history. Think we’re exaggerating? Take it from crypto OG and Messari founder Ryan Selkis.
Nine years in crypto. Today is the craziest day since I bought my first Bitcoin in 2013.
Crazier than Mt Gox
Much crazier than 3AC/ LUNA
— Ryan Selkis 🪳 (@twobitidiot)
Nov 8, 2022
In the span of hours, powerhouse crypto exchange FTX went from being the exchange behemoth that competitors were nervous about, to “oh crap, what’s going on here?”, to pausing withdrawals, to potentially being acquired by rival exchange Binance, to going straight up insolvent.
Jaw on the floor.
Let’s try to make some sense of what went down.
A Concerning Balance Sheet
The beginning of the end was a November 2nd report from CoinDesk.
In it, CoinDesk described how much of Alameda Research’s balance sheet is held in FTX’s FTT token. Considering that Alameda is FTX CEO Sam Bankman-Fried’s trading firm, this raised a whole bunch of red flags.
A trading firm whose assets are primarily tokens created by its sister exchange? Doesn’t exactly inspire confidence.
Consider Binance CEO Changpeng Zhao (CZ) among the skeptical parties.
Binance Death Blow
Binance, an early investor in FTX, held $2 billion in FTT tokens. CZ, supposedly concerned about the CoinDesk report and pissed off from SBF flexing his DC connections, tweets that Binance will be liquidating their FTT.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance)
Nov 6, 2022
Naturally, this causes fear among FTT holders, as having $2 billion worth of a token being sold at once would not be great for its price. So, investors respond by attempting to sell before Binance does. In other words, a good old-fashioned bank run.
For Alameda, a bank run on FTT is the worst possible outcome, as remember, CoinDesk reported that a huge amount of their balance sheet was in FTT. Suddenly, the majority of their balance sheet was cratering downward.
Investors, putting two and two together, quickly realized that a dead Alameda would most likely mean a dead FTX. Thus, a mad scramble to get off FTX began. It wasn’t long before FTX had a full-blown liquidity crisis and had to pause withdrawals.
This situation is now looking awfully similar to Celsius.
After a few hours of Crypto Twitter panic, SBF announced that FTX had a non-binding agreement to be acquired by Binance. But as we found out literally minutes ago, the deal is officially off.
According to Binance:
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com.
While details are, of course, still unraveling… Not even Binance – the world’s largest exchange – wants to touch this bag of hot, seemingly fraudulent, and debt-ridden, garbage we now call FTX.
This story is constantly evolving and seems to have a never-ending amount of layers, but for now, let’s recap some of the consequences of FTX’s demise for crypto.
SBF is no longer a billionaire
FTT is down ~90%
FTX-backed coin SOL is down 60%
Most major coins, including BTC & ETH, down ~20%
Robinhood (HOOD), which SBF owned 7.6% of is down more than 30% since Monday
The $2 billion FTX had raised from VCs (including Ontario Teacher’s Pension) has likely gone up in smoke
We also don’t know how far SBF/FTX/Alameda’s tentacles go…
They’ve invested billions of dollars into other crypto/fintech companies, donated millions to charitable causes (and politicians), and bailed out multiple multi-billion dollar companies. Speaking of bail-outs, in June, CoinSnacks commented:
“FTX/SBF/Alameda are stepping in to “save the day” with some individuals cheering about how private companies bailing out private companies “is how capitalism is supposed to work.” And yes, we agree that the private option is significantly better than the government using taxpayers dollars to bail out companies.
But we still can’t help but point out that the point of crypto is decentralization. SBF being the “lender of last resort” for multiple companies may be good for them, but we need to ask, how is it good for the users?”
But, okay… what does this actually mean for you and your money, you are probably asking yourself?
To be blunt, in the short-term, things are going to be rough. Crypto prices will be volatile, there will be a lot of fear in the markets, and we expect politicians to get even sharper toward crypto.
But in the long-run, there will be winners due to this debacle. So let’s make some predictions.
Western, regulated exchanges will gain market share.Investor confidence in offshore, unregulated, exchanges with murky ties have lost a lot of confidence from investors with this debacle. We expect exchanges like Coinbase (COIN), Kraken, and Blockchain, to be major winners in the coming years.
Investors will flock to “blue-chip” cryptoassets.Assets such as Bitcoin and Ethereum will once again be seen as relatively safe assets as investors lose confidence in many, riskier tokens.
Regulators will come out swingingRegulators are sure to have a “told you so” moment once elections settle down. As in, they’re going to have a lot more gunpowder as crypto bills begin to circulate throughout congress again. As always, let’s just hope they don’t go overboard by stifling domestic innovation going forward.
Taking a Step Back
Since we began writing CoinSnacks in 2017, we have time and time again pounded the table that investors should focus on putting their money in things they can understand (like Bitcoin, Ethereum, and backdoor plays).
We suggested that investors only risk what they are okay with losing in offshore exchanges and tokens that they don’t fundamentally have a grasp with. It’s worth highlighting what we send to every investor that signs up for CoinSnacks:
“You see, there’s a reason we tend to stick to the basics (i.e. bitcoin (BTC), Ethereum (ETH), crypto stocks, institutional adoption, the macroeconomic implications of crypto, etc.).
That’s because we can actually make sense of it.
The rabbit holes into DeFi, algorithmic stablecoins, NFTs, the metaverse, and the thousands of “altcoins” the world of crypto investing offers come with a double-edged sword.
Yes, many of these things are groundbreaking, innovative, exciting, and do serve a purpose to some extent in the new digital age of finance and banking. But many folks fail to realize just how speculative these “trendy” experiments are.
Despite all of its promise, the deep corners of the crypto market can be dangerous for investors. We’ve witnessed copied-over whitepapers, endless shilling, deceptive marketing, exchanges listing everything under the sun just to drive more fees… the list goes on and on. But most importantly, we’ve seen the retail crowd rush into these assets without any foundational understanding of how these blockchain protocols actually operate.
As the saying goes, the important thing is to know what you know and know what you don’t know.