Paper 43 - FTX Dying With $10 Billion Hole
FTX wreaks havoc across NFTs and crypto
Gm team
Hope you are well after the absolute train wreck this week which was FTX.
Today I focus on that - because it clearly has huge implications for NFTs and crypto moving forward.
Have a great day,
B
Contents
FTX Implosion
Meme of the Week
1. FTX Implosion
One of the biggest cryptocurrency exchanges looks like it has gone bankrupt.
It has done so with an almost $10bn funding hole, by reportedly using customer deposits, all the while its leader, Sam Bankman-Fried, had been cozying up to politicians in DC (second largest Democratic donor this cycle; literally was just on a stage in the Bahamas with Bill Clinton and Tony Blair.)
The space is shocked.
Although many believe in the importance of self-custody, nothing suggested keeping funds on FTX would be this bad. After all, FTX were the white knights throwing around money earlier on in the cycle to save other failing companies e.g. Voyager.
They had also sponsored the F1, cricket, baseball, and bought naming rights to a basketball stadium (buying the naming rights for a stadium is quickly becoming the most obvious top signal it seems - watch out crypto.com).
But what actually happened and why is it so bad?
Here is a short blow-by-blow chronology - followed by my thoughts
Last week it became obvious that much of Alameda’s balance sheet was made up of FTT, an FTX created coin. (Alameda is a trading firm run by SBF too, but it is a completely separate entity to FTX - at least it should have been…)
SBF had also been tweeting negatively about CZ, the CEO of Binance, and had allegedly been lobbying against Binance (more broadly he was definitely lobbying against De-Fi, trying to create regulations in the US that would favour his own business)
After 1 and 2, CZ tweeted his decision to sell all of Binance’s FTT holdings (Binance was an early investor in FTX, and sold their stake for $2bn worth of FTT. Publicly CZ said he would not support a company that was lobbying behind people’s backs against the industry. This makes sense - but he also probably noticed something else…)
Because Alameda had such a large amount of FTT on its balance sheet, it was likely they used that as collateral for loans. This means that if FTT went below a particular price, they would get margin called as the value of their collateral decreased.
Caroline, who ran Alameda, asked CZ if he would sell all Binance’s FTT to Alameda at $22.
I read a tweet which suggested if Alameda really wanted an asset, they would let the price fall and buy it cheaper. Buying low is better than buying high, right? Not if you need to defend $22, and something bad happens internally if the price falls below that… I was persuaded by this way of thinking.
CZ declined. The FTT price dropped to around $16 for a while.
A bank run starts on FTX. Everyone wants to try to get their money out while they can.
After pretending like everything was fine, FTX withdrawals stop working.
Suddenly an announcement comes out that CZ has entered into a LOI (Letter of Intent) to consider buying out FTX International (the US business is allegedly not in trouble, so this was for the international business). No guarantees were given.
Within 24 hours CZ says they will not save FTX. The situation is too bad. Rumours of a few billion dollars missing.
Panic selling ensues as market realises no saviour, plunging the FTT token to around $2-3. Hearing more like 5-6 billion dollars missing.
SBF issues very weird apology, thinking this is some sort of game he has lost, when he has lost millions of dollars of customer funds. Now it’s more like $9 billion mission.
So where on earth is the money? Well, it appears that FTX and Alameda were commingling funds, even though they are completely separate entities and it was a violation of FTX’s own terms of service to lend these assets out to another entity.
And what did Alameda do with the money? Looks like FTX customer funds were given to Alameda to sort themselves out. It appears they have lost a lot, if not all.
So now what? Well, there are two very recent developments today which only add to this complete shitshow:
a) For some reason Bahamian withdrawals have turned on (FTX is based in Bahamas - *more fraud to get team’s funds out??!*). AND it seems that people are buying FTX accounts for 0.1 on the $ and getting a Bahamian KYC done somehow, and then withdrawing the full amount - pretty wild.
b) NFTs are also being used as part of this process to get funds out. Eg the Bahamas user creates an NFT, the stuck user uses their stuck funds to buy the NFT, so that the Bahamas user can withdraw their funds for them (perhaps for a fee?)
This is a horrible situation. This is not the end of it. It is mind boggling to think the people who created this mess are still in charge and making crazy decisions. A final thought from DC on how it seems to be the case that these self-aggrandising leaders always seem to be so far up themselves that they cannot see the truth of their crimes.
Concluding thoughts:
Take responsibility for your own funds - we are clearly not in a mature enough space to allow others custody of your funds.
Be very sceptical of “earn” programmes - if you want to give your money to other people to lend, understand that risk. They may be buying a dogcoin or doing deals with the most useless counterparties.
We need regulation - Lack of regulation in traditional centers of power have pushed companies like FTX, and users around the world, to set up and do business in places where this type of fraud can happen more easily with less regulatory oversight.
Most people are morons - People really do not know what they are doing. Very, very few people do. Especially in this nascent space. Be mindful of “hero” worship. It has happened too many times this year alone.
Flying too close to the sun - Watch for the people who are rising too fast, and enjoying the process of rising too much. They all fall fastest.
2. Meme of the Week
Absolutely not.
Have a great day,
B
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Disclaimer: The content covered in this newsletter is not to be considered as investment advice. It is for informational and educational purposes only.
I hold some of the NFTs mentioned in these newsletters.
Great read indeed!