The cautionary tale of FTX and the future of bitcoin
By popular demand, today we consider bitcoin – and the amazing story that is FTX.
Geez, this is a story – it’s hard to know where to start. The more you dig, the more it comes out. It’s a cautionary tale of the madness that engulfs crowds during investment fads and bubbles.
I’m sure many of you already know the story, but new developments are happening every day, so I’ll quickly summarize it before moving on to what it means for bitcoin.
The history of FTX
Sam Bankman-Fried was a nerdy young crypto “entrepreneur”, born to an upper-middle class family in California. His parents were both professors at Stanford Law School.
In 2017, he created the quantitative trading firm Alameda Research (which would trade based on mathematical models). Then, in 2019, along came FTX, a crypto exchange that became phenomenally successful, phenomenally fast.
In July 2021, barely two years into its existence, FTX raised a $900 million Series A investment at a valuation of $18 billion. Three months later, it closed a $420 million Series B at a $25 billion valuation, and three months after that, in January of this year, it raised another $400 million. This time the company was valued at around 32 billion dollars.
To put these numbers into some sort of context, Barclays, Soc Gen and Deutsche Bank – banks that have been around forever – all have smaller market caps in the $20-30 billion range. To use another example, $32 billion would be more than the UK collects in stamp duty, fuel duty or alcohol and tobacco taxes in a year. That’s about five times what it collects in inheritance tax.
Bankman-Fried himself was worth $16 billion, and at the age of 30 was on the cover of Fortune magazine, along with a headline asking if he was “The Next Warren Buffett?”
FTX’s blue-chip and “smart money” investors included Japan’s SoftBank, venture capital firm Sequoia Capital and hedge fund Tiger Global. Even the Ontario Teachers’ Pension Plan put in $95 million. (What has your pension manager done with your money?)
There were rumors of another increase of $1 billion in September. However, that didn’t happen and the bitcoin bear market meant that the tide went out in the crypto industry. We were soon to find out who had been swimming naked.
FTX is suffering in the bitcoin bear market
Negative press slowly began to emerge in the following months.
People started asking questions about FTX’s accounting and other practices. Short sellers also began to take notice. They usually detect fraud faster than anyone else.
On November 6, an article at Coindesk raised doubts about the balance sheet of Bankman-Fried’s sister company, Alameda.
Changpeng Zhao, CEO of Binance (the world’s largest crypto exchange), who had been an early investor in FTX, announced that Binance was selling all of its FTT coins – as much as $2 billion worth (FTT coins are part of the pipeline for FTX Exchange). The value of FTT began to fall.
Suddenly there was a scramble to take assets off the stock exchange. It was believed to have the assets to cover the liabilities, but it turned out that this was not a full reserve exchange and FTX did not have the funds to meet the run.
(See the interviews with 28-year-old CEO Caroline Ellison who describes how she doesn’t like stop losses. It turns out she had hardly any risk management at all.)
Chain analysts soon realized that FTX did not have the funds to cover withdrawals. On November 8, Bankman-Fried said he had “enough to cover all client holdings” and that “he does not invest client funds”, but the run continued. That evening the withdrawals were stopped.
In an effort to restore confidence, Zhao and Bankman-Fried announced that Binance would buy FTX soon after. However, Zhao said the next day that after doing its due diligence, Binance would not buy FTX.
A day later, FTX filed for bankruptcy.
Simple, simple: Bankman-Fried’s net worth went from $16 billion to zero in barely 72 hours. FTX had $900 million in assets against $9 billion in debt.
And then, the day after that, about $600 million was hacked from FTX’s wallets and transferred to Lord knows where – presumably Panama, Bermuda and Cayman.
As FTX unravels, stories begin to emerge
Since then, all kinds of stories have emerged. Weird sexual incidents at the companies. Bankman-Fried shares the stage with Bill Clinton and Tony Blair. Flight tracker apps that show private jets fleeing to jurisdictions where they cannot be arrested.
The contagion has spread to other crypto operators such as BlockFi which has stopped withdrawals. Author Michael Lewis by Large card fame apparently already signed a film deal – he had been following Bankman-Fried for six months. (He must have been aware of what was going on.)
FTX was the US Democratic Party’s second largest donor, donating about $37 million in the last cycle, and pledged upwards of $1 billion if Trump ran in 2024.
Heck, it’s even come out that Ukraine had money with the business.
All the while, Bankman-Fried donated to what he considered good causes – and talked about giving even more. He talked endlessly about altruism and utilitarianism. His lectures were peppered with motivational slogans, all delivered with nerdy, beta-male sincerity.
Illustrating the uselessness of rating agencies (as if 2008 wasn’t enough), and ESG, FTX received a higher management and governance rating than Exxon Mobil.
The brand has sponsored sporting event after sporting event – baseball, basketball, F1 – star athletes like Tom Brady.
Rather like JP Morgan bailing out the markets in the panic of 1907, Changpeng Zhao is now forming “an industrial recovery fund to help projects that are otherwise strong but in a liquidity crisis”.
It’s all just extraordinary.
What does FTX’s collapse mean for bitcoin?
It’s worth remembering that in the wild west, this new financial technology is where we’ve been before. Many times, in fact; best known for Mt Gox. It is difficult to emphasize how big a deal the bankruptcy was at the time.
In 2014, Mt Gox was the largest bitcoin exchange in the world, handling over 70% of bitcoin transactions, according to Wikipedia. When news broke that it had been hacked and it suspended trading, halted withdrawals and filed for bankruptcy, the news triggered an instant 50% drop in bitcoin (from over $800 to $400).
This time bitcoin has “only” fallen by 20%-25%, although other coins, especially Solana (FTX held a lot), have fallen by much more. The recipients have been coins of which FTX did not have large quantities.
Fortunes have been decimated. Life has been ruined. Many of last cycle’s crypto darlings are now headed for the scrap heap if they aren’t already there. The list of the top ten coins by market capitalization is already very different from what it was a year ago. It is completely unrecognizable from the previous cycle.
But bitcoin continues.
There will be many who cannot tell the difference between the sound, inflation-proof, censorship-proof money that is bitcoin, other sinister cryptocurrencies and psychopathic fraudsters, who taint one with the other.
There are many who will declare that this is the end of bitcoin. It won’t be. It’s a blow to bitcoin and crypto more generally. There will be a lot of negative press.
But remember that just because criminals use US dollars or cars does not mean that all US dollar or car users are criminals.
Bitcoin will survive and grow.
Do not keep your money on third-party exchanges. “Not your keys, not your coins” as the saying goes.
And if you’re one of those people who wish they got in but never did, it’s probably not a bad time to dip your toe in. There’s blood in the streets. As someone richer than you or I once said, it’s time to buy.
Will this story mark the lowest? No one knows the answer to that, but let’s just say there’s a lot more bad news priced in than good.
The next major support line is around $12,500.