These past couple weeks have been rough to say the least, as the crypto world continues to pick up the pieces in the aftermath of the epic meltdown of FTX, previously the world’s third-largest crypto exchange. The crypto industry has seen its fair share of catastrophes over the years, but few compare to the sheer magnitude, complexity and number of parties affected in this blowup (RIP Tom Brady & Gisele’s venture arm). Although I do believe there will be silver linings to this catastrophe, the story is far from over and it will take some time for everything to rise to the surface.
As a quick recap, the unraveling of Sam Bankman-Fried’s empire accelerated quickly on November 2nd, when Coindesk released a leaked balance sheet with an overview of assets held by Alameda Research, SBF’s trading firm that heavily utilized FTX. Exposed was a gaping black hole of liabilities to the tune of several billion dollars, much of which was leveraged against an “asset” called FTT, which is the native token of the FTX exchange, among several other questionable and illiquid forms of collateral.
FTX had essentially created their own crypto token out of thin air, used it to take out loans and leverage against to make incredibly risky bets on speculative shit-coins, purchase luxury real estate in the Bahamas, donate millions of dollars to the Democratic party… The list goes on, but the bottom line is that SBF and his band of MIT & Jane St. misfits used FTX customer funds, not company profits, to go on a gambling and spending spree of epic proportions. The list of prominent names that are speculated to have been in bed with FTX or received money from them seems to keep growing as more information comes out, however I digress…
Set them up, knock em down
Not long after the leaked balance sheet made its way around the internet, Binance’s CEO, Changpeng Zhao (CZ), initiated the collapse and ultimate demise of FTX by announcing on Twitter on November 6th they would be dumping of a large position of FTT token holdings Binance had previously acquired.
SBF and CZ had somewhat butted heads publicly in the past for various reasons, other than being direct competitors of one another. Whether or not CZ had a plan in place prior or not to take down FTX, he took this opportunity to drive the stake through the amphetamine fueled heart of his rival, SBF.
In a matter of hours after the above tweet was released, the FTT token collapsed and kicked off a classic Bank(man) run, leading to the publicly displayed official insolvency of FTX. Billions of dollars were lost and millions of people were impacted in the blink of an eye, ripping open an unsettling new chapter in crypto’s volatile evolution.
So what the hell happened and where do we go from here? Like I said before, this story has just begun and likely will take a long time to play out as the situation seems to get more complicated and bizarre by the day.
Lovable poster boy, to manipulative sociopathic fraudster
Sam Bankman-Fried (SBF), once portrayed in the mainstream media as the industry’s lovable nerdy poster boy, had the world eating out of the palm of his [shaky] hand as he graced the covers of financial magazines and touted partnerships with A-list celebrities.
“The Next Warren Buffet” had just about everyone fooled, even the elites on Capitol Hill where SBF lobbied aggressively in recent months, becoming the second-largest political donor to the democratic party (using stolen customer funds, we now know).
Following the collapse, in a bizarre series of cryptic tweets and DMs with Vox, SBF quickly exposed a rather sociopathic switch flip, as he changed his tune to admitting that his efforts in DC were all for show and, “fuck regulators… they make everything worse… they don’t protect consumers at all”.
It is pretty clear that SBF was working as quickly as possible to jam crypto bills and regulation through, in order to close the door behind him and FTX on any future competition.
Regulatory Urgency
Although this situation is a black eye for the entire crypto industry, there are silver linings to be found amid all of the chaos. As far as regulation goes, this is far too big of a blow up for SEC chair Gary Gensler to continue sweeping under the reg and blocking any sort of progress on creating fair regulatory guidelines for the crypto industry, who have been begging for it to no avail over the last decade.
Gary Gensler has continued to deny approval of a Bitcoin spot ETF in the United States, claiming that he is doing so for ‘investor protection’. I don’t know about you, but maybe forcing US citizens to utilize sketchy offshore exchanges to buy crypto, only to have billions of dollars vaporized by criminals, isn’t the best way to protect American consumers…
Considering how many clowns that have been exposed in recent months who were once considered to be “Industry leaders”, there are just as many crypto advocates out there advancing the space forward that don’t get nearly enough credit. One organization in particular that I would recommend everyone pay attention/ tribute to, is The Chamber of Digital Commerce, who is helping lead the (real) regulatory charge in DC for the betterment of crypto and blockchain technology.
The fact of the matter is, no real sizable investment is going to take place in cryto until the big money and institutions can park their money safely in digital assets. That won’t happen until there is progress on a regulatory framework & some clarity that has plagued crypto since its inception.
Wave of self custody adoption
Ledger has had record sales of hardware wallets over the past month, as the recent crypto contagion has accelerated the adoption of self-custody. ‘Not your keys, not your coins’ has been shouted from the rooftops in crypto circles for quite some time, however it can often take a crises or an expensive lesson for the masses to truly understand how important this is. Bitcoin and other crypto assets have been flowing out of exchanges and into self custody at record speeds, showing that trust in centralized entities has dwindled dramatically, for good reason.
In my opinion, the concept and practice of self custody for crypto is a little unnerving and not likely to gain mass adoption in its current state. Hardware wallets are fairly simple to use when all of the correct homework is done and the right steps are followed. However, there is certainly margin for error that can lead to loss of funds if mistakes are made.
Having said that, self custody and the ability to “be your own bank”, is an incredibly powerful tool that should be practiced by anyone who has an intention of holding crypto for longer periods of time.
“Paper” Bitcoin disrupting true supply & demand of BTC
FTX apparently only had about 1.1 ACTUAL BTC listed in their possession around the time of collapse. In other words, the exchange had mostly been selling Bitcoin IOU’s (aka fake Bitcoin) similar to paper backed gold notes for example, but controlled by… well, criminals… instead of a regulated entity.
Assuming this is true, it is absolutely insane when you consider FTX was previously the third largest crypto exchange by trading volume in the world behind Binance and Coinbase. This also raises the question of whether the price of BTC (and other crypto assets with manipulated true balances) were artificially suppressed, due to an inflated supply of fake assets being distributed into the market. Only time will tell how this gets recognized in markets and how everything shakes out. Unfortunately the demand for magic internet money has taken a serious hit and investors are certainly going to be hesitant to dive back in anytime soon, however this dynamic is definitely something to think about once froth returns back to the markets and prices finally begin to elevate once again.
Quick shoutout to @BowTiedBull on Twitter - highly recommend you follow this group of ex Wall St., Tech, VC anons that provide signal through the noise on a variety of topics.
Keep calm and zoom out
Bear markets are brutal, there is no doubt about that. However, any true believer in the underlying, technology value and long term potential of proven crypto (or any) assets, should see times like these as incredible buying opportunities, if approached rationally and with patience.
The short term horizon is cloudy, but sooner or later the bull market will return. When it finally does, I have full conviction that you will be happy to have stuck around.
- Tommy Sullivan