Sorting Out FTX
Opportunity Follows Devastation
It looks to me like FTX was all hat and no cattle. I have written about their desire to revamp clearing. I am not a fan of the idea. They also wanted to disintermediate brokerage houses. I am not exactly a fan of that idea either.
Neither of those ideas is revolutionary.
One thing about the finance industry is because it is incredibly competitive it is incredibly innovative. New stuff is tried all the time. There is failure too. Not everything works. There is some tolerance for failure as well.
But, when you act out as FTX did, there is no tolerance when it is time to pay the piper.
The innovation that is cryptocurrency has had plenty of black eyes and bruises along the way. But, yesterday there was a bit of an earthquake that will reverberate for quite some time.
Basically, FTX CEO ruffled Binance CEO’s feathers. Binance made a strategic decision in its own best interest and announced it was selling $850MM of FTX currency. That caused a bank run and now FTX is bankrupt. This is not unlike the Citadel play on UST last May. TerraUSD is trading for .02.
To make things worse, Sam Bankman Fried lost 94% of his net worth, basically in one day. $14.6 Billion to $991 million. I don’t think the down program on the elevator has ended either. If I am a personal creditor to Bankman Fried, I am getting my money ASAP.
Binance has offered to acquire FTX non-US trading operation. They will pay peanuts for it. The reverberation is that the entire FTX company was supposedly worth $32 billion. Many venture funds had marked up their investments in FTX and now they will get beat up pretty good. Their LPs aren’t going to be happy and it’s going to leave a mark.
The entire crypto space has seen token values fall. Bitcoin is under $20k. I have thought it was going to $12k and I think it will get there soon now. It might go lower than that. FTX’s own token is down 78%. Solana, a darling of the crypto world, is down 45%. FTX was one of the primary market makers in Solana.
When you say you have the cash, you better have the cash when someone says it’s time to pay. Can you imagine what FTX clearing would be like if implemented? Can you imagine disintermediating all the brokers and going direct to FTX? It would be worse than MF Global and Jon Corzine’s shenanigans.
How many crypto things have been built on a house of cards? It’s crazy that these people think they can do that. If you say something, back it up. If there is supposed to be money in the bank, there better be money in the bank.
Even worse is that as the crypto sector has collapsed from its highs, it was FTX founder Bankman Fried that acted as a white knight coming to the rescue. What is the value of his credibility now?
He even spent a reported $50MM on political candidates. Crazy. When you see a CEO spending money like a drunken sailor it’s usually not a good sign.
The more this continues to happen, the more it looks like tulip bulbs. Permabear Tim Knight correctly, and sarcastically, points out that every single time a company puts its name on an arena bad things happen to the company.
Here is the problem with crypto. It’s all pizzazz and no punch. It’s speculation. It sure seems like it could be powerful. It has a lot of great ideas. However, no one actually can use it. I don’t think anything has actually been built on top of it that is used by anyone anywhere for solving a real problem.
Devastation can bring opportunities.
Well-run exchanges with traditional operating metrics might survive and thrive, if the engineers building crypto stuff actually builds anything of value. I am an investor in Bitnomial and they have not been a moon launch. They have taken years to build up their structure. My investment might pan out and be great. It might not too. But, at least I know the people running it are honest and on the level. The other benefit is that I am not relying on specific crypto for value. It’s a sector play.
The same could be said for our fund’s investment in MLTech. The company vets and verifies trading strategies and lets pools of capital use them. Interestingly, in the crypto crash, they have done well and the strategies on the platform are up roughly 30%.
When huge dislocations happen, it’s often a great time to build a startup or invest in one. I don’t think we are there yet in crypto and I don’t think we are there yet in the broader economy. If you are going to do something in crypto, it has to be usable with a short learning curve. The switching costs from existing processes have to be extremely small, or non-existent.
The crypto companies out on the street trying to raise money will have more trouble now than they did before. The ice age is upon us.
By the way, this devastation isn't over. A lot of adjacent companies are going to feel it
I’m giving a guest lecture for one of my favorite finance profs from the early 2000’s at UST in St. Paul. I had 20 slides on crypto and most are relevant... but If you’re ok with it, I’d like to pull up this substack and go through your stances and past posts about it. You have laid all this out beautifully. The prof tells me the class needs a reality check, most of my lecture is based on market mechanics and what they don’t teach in academic finance. I now have a large amount of info to sift through regarding Sam Bankman-Fried’s activities incestuously wrapped up in FTX