(Crypto) Winter is Coming
The Atlanta Falcons in the Superbowl, the Toronto Maple Leafs annually, the 2008 housing market and now FTX… all collapses of epic proportions. The first three on that list can be easily explained away with coaching decisions, roster problems, and predatory lending; the latter of the bunch is still murky. What caused the collapse, was it criminal, where is all the money, and what is the residual effect on the cypto market? We can’t be totally sure, but we can make some educated guesses.
A Crash Course on FTX.
Founded by the anointed “golden boy” of crypto, Sam Bankman Fried (SBF), FTX is (was) a digital asset exchange that aimed to bring crypto trading to the masses by way of an above board, regulated, well-funded platform - bringing crypto out of the “wild west” and into the mainstream. Starting only a few years ago you may have noticed public figures talking about it, endorsing it, and even starring in super bowl commercials for it. Gone were the days of needing to be tech-savvy to enter the world of trading Bitcoin, Dogecoin and other buzzy assets. If Tom Brady can use FTX, surely we all can?!
As FTX’s aggressive marketing campaigns grew, so did the flow of venture capital into the business, to the tune of $2+ billion at valuations north of $30 billion… a tidy little valuation for a business less than 3 years old.
SBF began to lobby for strict regulation around digital assets, which had been largely unregulated, underground assets until then. This lead many to view him as the face of crypto entering 2021, and again garnered more support (and users) for FTX. By the end of 2021, FTX’s reported revenue had surpassed $1B. Things were looking pretty, pretty, pretty good (*crosses fingers that the irony of a Larry David reference isn’t lost on everyone*).
Context: He also starred in the FTX Superbowl ad….. A joke isn’t good unless you have to explain it, right?
What The H#&L Happened?
As fast the rise of FTX was, the collapse was faster. In late 2022, seemingly out of nowhere, the collapse of FTX was upon us. We will learn more in the coming months about the details of what happened during the collapse, but what we do know is that FTX (allegedly) transferred the bulk of its business and customer funds to one of SBF’s other companies, Alameda Research, to invest in their own coin called FTT. As FTT went, so did FTX’s balance sheet. While FTT was openly traded (at a limited capacity) on FTX, the CEO of one of their major competitors (Binance) had managed to accrue a massive amount of their FTT coin. To over-simplify things, the competitor CEO dumped his holdings in FTT, the coin price plummeted, and so followed FTX’s cash.
When the market got wind of the FTT crash, many rushed to pull money from their FTX accounts, causing billions of dollars to funnel out of the platform. On November 8th, 2022 FTX froze all withdrawals - the collapse had arrived.
SBF would later say that the gap between FTX’s holdings, and what was owed to customers was $8 billion. While there were certainly additional factors contributing to the collapse, the fall of FTT was the coup-de-grace.
Was It Criminal?
There certainly seems to be a level of fraud and misuse of customer and investor funds here, but the level of criminality is yet to be determined. SBF has been arrested and charged with wire fraud, securities fraud and money laundering in relation to how he handled customer money. We will see what sticks. Illegally moving customer funds to Alameda Research will almost certainly be impossible to overcome, but I am admittedly not a lawyer – Although I have watched an egregious amount of Law and Order episodes.
What Will Be The Fallout?
For the time being, crypto will once again fall off your parent’s radar. The lack of regulation and stability will again push more conservative investors out of the space. Until regulation of the space can be achieved, it is hard to see any institutional or widespread retail adoption. Some US states, namely New York, have created a framework for crypto regulation, but most states have not and the federal government is nowhere close. SBF had been working with global governments to push regulation forward – for him to now be in cuffs, charged with fraud, sets crypto regulation back immensely.
So, prepare for what many are now calling the “crypto-winter” which is likely to be an extended downturn. How long will the downturn last, its hard to say. But what we do know is that crypto has once again become the wild-west, and SBF is no longer our John Dutton.
Howdy Y’all
