The second-biggest crypto exchange in the world just collapsed. Is your money safe?
Ok, this is all over the papers and I’ve been reading a lot about it. You’ve probably heard something about it, and you should have.
This is potentially massive.
Ok, so let me try and spell out what I think has happened.
So FTX is – sorry, was – a crypto exchange. It’s a place where you could trade crypto, with a particular bent toward derivatives and futures. It issued a token call FTT – which acted like equity, but totally wasn’t equity.
A couple of weeks ago it was worth $32 billion. Today it’s worth nothing. That’s a massive wipeout in a very short time.
So what it seems – and it’s an evolving story, so this is just my best guess from the reading I’ve done – so it’s seems that Sam Bankman-Fried (SBF) – who was crypto-royalty, with a net-worth somewhere around $16bn – built an owned FTX.
However, he also owned another 130 entities, if the bankruptcy filing is to be believed.
One of those entities was Alameda – a crypto hedge fund that took bets on crypto currencies.
Turns out, FTX had a ‘back door’ installed, so SBF could funnel customer money from FTX to Alameda.
FTX customers had no idea. They had no idea they’re money was out in the metaverse taking large punts on sh!t-coins.
But nobody knew.
Except maybe for Changpeng Zhao.
Zhao – or CZ – is the owner of Binance. The biggest exchange on the market.
At the start of the week CZ said that Binance was selling all of its holding of FTT. Something felt off.
That caught people’s attention. Why would you announce you’d exit a position before you’d actually done it.
The price of FTT started to collapse.
Alameda offered to buy Binance’s FTT directly at $22 ea.
CZ said no.
He held on and watched as the price of FTT collapsed.
It looks like Alameda and FTX were using FTT as collateral on loans. In corporate finance this is called ‘endogenous equity’ and is typically seen as a very bad idea.
Because if things go south, then you’re share price is collapsing, and you’re collateral is collapsing, which means you’re going to get margin called.
And things were going south, fast.
And while FTX was an exchange, because it was lending and borrowing from customers to fund their derivative trades, they were acting more like a bank.
And now people who had money in FTX were worried that there were going to get there money back.
You now had a good old fashioned bank run.
People wanted to take more money out than FTX could deliver, and the only hope was that someone would come in and bail them out.
Enter CZ – the guy who started the bank run. He says Binance will buy FTX. He does that on Wednesday.
On Friday he comes out and says, yeah, nah, we did the due diligence, and the business is a dog. We’re not buying it.
The bank run is in full swing now, and with no one willing to step in and bail them out, FTX files for bankruptcy.
And with that, we learn that FTX had just $900m in liquid reserves against liabilities of $9bn.
It was broke. And from what it seems now, it was fraud.
SBF has been arrested. The CEO of Alameda has fled to Dubai.
Customers look like they’ll be lucky to get 5 cents in the dollar.
Absolute bonkers.
And now the whole crypto-space is in the middle of a shake-down.
Because you only know who’s swimming naked when the tide goes out.
Who else has over-leveraged into bad crypto bets, like Alameda.
Who else has just been defrauding customers in an unregulated crypto orgy, like FTX.
Who else is exposed to FTX, Alameda, or any one of the 130 entities set up by one of crypto’s most famous poster boys?
Where does it end?
I’ve got some thoughts on that. But now you’re caught up on one of the biggest stories of the year, I’ll drop that tomorrow.
JG.
Sam says
I love your articles John. They’re passionate and punchy. Please get me to proof read them, it will take me very little time and you’ll have no more unnecessary errors that let down your otherwise excellent and informative artcles! Much respect, Sam.