It seems like it was just a week ago that the crypto markets were happy and healthy. In fact, a week ago I was at Web Summit interviewing a number of smart people about their work in crypto, including Amy Wu of FTX. Our talk, available below, was primarily about the crypto winter that we were experiencing at that time, which, if you’re familiar at all with the markets, was actually quite balmy.
Fast forward to yesterday and there was blood on the balance sheets. What happened? And why?
Why did FTX fail?
Like most markets, the crypto market is cyclical. There are, to paraphrase the Rembrandt’s, down days, weeks, months, or even years. The current winter began around May 2022 and solidified itself in June 2022. This roughly coincided with a massive rout in the NFT market which, after the rise of the ICO, was the “next big thing” in crypto that ran up the price and turned everyone into market experts. That said, when crypto reenters a bull stage it is quite difficult to break it without extreme extenuating circumstances.
Enter Sam Bankman-Fried. Bankman-Fried ran two organizations, the FTX exchange and Alameda Research. The exchange was long the number three exchange, at least by trading volume, and Alameda Research was an investment firm similar in spirit to Three Arrows Capital, another disgraced hedge fund. What happened was that Bankman-Fried essentially used FTX funds to prop up Alameda Research, resulting in a liquidity crisis. In fact, the company owed so much to, essentially, itself, that the entire facade crumbled.
CZ, head of the crypto exchange Binance, chimed in saying that he would buy FTX outright in order to cover the liquidity crunch. How it started…
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.
— CZ 🔶 BNB (@cz_binance) November 8, 2022
How it’s going…
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 https://t.co/FQ3MIG381f.
— Binance (@binance) November 9, 2022
Will you get your money back from the FTX debacle?
The answer, as far as anyone can tell, is “probably.” The exchange isn’t exactly insolvent but it’s definitely not in good shape but Bankman-Fried is now working with Justin Sun of Tron to improve its balance sheets.
So what’s should you do now?
First, if you have any crypto under leverage – that is if you bought on margin – you’re probably out your money. Yesterdays flash crash below $15,000 trapped most long investors in a bear trap, resulting in zeroed out balance sheets. If it happened to you then you’re definitely due a stiff drink.
As for the future of crypto in general, I think it’s important to think about the industry as a whole. It is, as you can imaging, full of grifters. But it’s also full of people who want to enact real change, at least when it comes to financial freedom and new monetary systems. Jesse Powell of Kraken, for example, offered this cri de coeur:
2/ Our good, trusting nature makes us easy targets for con artists. Some even tell us straight up that they're here for profits, not crypto, and we praise them for their honesty.
Yet we're surprised when they turn out to be who they said they are. We need to raise our standards.
— Jesse Powell (@jespow) November 10, 2022
As Powell notes, the primary problem in crypto is that grift and greed are rewarded. As a former crypto entrepreneur myself, I watched the worst projects in the world get funded and saw money flow into obvious Ponzi schemes and brazen cash grabs. Why? Because the numbers, on paper, looked good and investors are always looking for 100x or 1000x returns over anything else.
That said, we were all fooled by FTX’s soft power and Bankman-Fried’s “nerd with money” schtick. Take our own Jordan French who interviewed the FTX COO, Constance Wang, in April. Everyone on the panel was completely clueless and, we assume, even Wang herself wasn’t expecting a November like this one.
The bottom line is simple: no one knows where the crypto markets are headed but, like the most parabolas, it’s going to arc forward. Where it lands – if it lands – is anyone’s guess but we definitely have to stop rewarding bad actors. That it took a dedicated journalist like Coindesk’s Ian Allison to dig up the malfeasance is important. First, it proves that crypto media has long moved past its early stages of gee whiz cheerleading and second it shows that the industry is receiving the scrutiny it deserves. That average investors have to suffer while billionaires whine, however, is the real tragedy.
1) I'm sorry. That's the biggest thing.
I fucked up, and should have done better.
— SBF (@SBF_FTX) November 10, 2022