Crypto is running out of Dominoes

Sam Bankman-Fried, the 30-year-old cryptocurrency, which each of Bloomberg, New York Timesoath New York magazine within two months, woke up on Monday worth somewhere around $16 billion, went to bed on Tuesday no longer a billionaire as his crypto empire took on water and began to sink, then began Wednesday watching his own lifeboat spring a leak . It’s tricky to pin down the net worth of a super-rich with any real certainty—to take a timely example, what does it mean for the richest person in the world to have so much of it tied up in stocks whose prices will inevitably drop the moment he tries to liquidate said share capital? — but while that $16 billion mark may have overstated how much Bankman-Fried was “worth,” the scale of his fall is equally stunning. FTX seems to be dead.

Maybe you remember those fat Super Bowl commercials where Tom Brady and Larry David tried to convince you that you would die a sad loser if you didn’t buy cryptocurrency on FTX, or maybe you’ve watched a football, baseball or basketball game framed by FTX the logo. The company has tried to make itself everywhere. Bankman-Fried runs (or ran, perhaps) both FTX, one of the largest crypto exchanges in the world, as well as Alameda Research, one of the largest crypto hedge funds in the world. FTX raised over $2 billion in investment at a $23 billion valuation, and over the past three years, Bankman-Fried emerged as one of the most influential prophets of the crypto world and its jurisprudence. Cultivated his character as a norm-bucking mad scientist, as “a sort of capitalist monk,” helped add to his legend. From the beginning of the pandemic until about six months ago, there was a boom in business and FTX was at the forefront. Within four years of FTX’s founding, Bankman-Fried was one of the world’s youngest self-made billionaires and a well-regarded semi-public intellectual, and he was already cultivating political influence as a check on any potential future regulations. (He once promised to give up to $1 billion to Democratic candidates in the midterms. He ended up spending a tiny fraction of that, perhaps for reasons that emerged this week.) America’s attitude toward the super-rich is something akin to oracles. worship, and Bankman-Fried’s position at the forefront of what so recently this spring looked like the future made him even more attractive.

As bad times hit the crypto market, and the sector lost $2 trillion in valuation this year, Bankman-Fried seemed to have put FTX in a position to weather the chaos and chart a path from this crisis to something resembling a coherent future—mainly by achieving in distressed assets. After shadowy seed company BlockFi went bust last summer when regulators successfully took them under control, FTX stepped in with a $400 million bailout and an agreement to buy them for somewhere between $15 million and $240 million, well below their valuation 5 billion dollars. When Three Arrows Capital collapsed and its founders disappeared, leaving behind $3.5 billion in other companies’ assets, FTX filled at least one of the most important holes. Among other things, crypto firm Voyager, which lied to customers that their deposits were protected by FDIC insurance, had to declare bankruptcy following the 3AC scandal, but FTX bought up their assets and moved their customers to their own platform. As larger and larger crypto companies went under, the foundations beneath the entire industry seemed to be shaking uncomfortably, yet for the crypto optimist, JP Morgan’s Bankman-Fried act was a sign that the sector at least had a floor, at least as long as you ignored how heavy crop farming resembled a Ponzi scheme.

Still, the Voyager crash and FTX’s role in “bailing them out” raised a number of serious concerns. Voyager’s finances revealed that Alameda Research owed them at least $370 million, and perhaps more than $1 billion. Last week, CoinDesk got its hands on Alameda Research’s second-quarter financials, which showed that things weren’t as stable as some thought. Of their $14.6 billion in assets, $5.8 billion, multiples, were tied up in FTX’s native token, FTT. That should be extremely alarming, as the self-generated cryptographic token has proven to be one of the most obviously fake tools in cryptography. If a company can create and inflate value out of nothing, by itself, in the form of a token disconnected from the market, is it really worth it? (No.) Was $8 billion in debt, $7.4 billion of which was in the form of loans, a sign that it had become too leveraged? (Yes.) But if the Bankman-Fried empire was more vulnerable than previously thought, was it really too big to fail?

We got a shocking answer to that last question on Tuesday. A few days later, Bankman-Fried continued to struggle victorious, nerdy tasterival exchange Binance, the world’s largest, announced that they would was selling all of its FTT tokens due to “recent revelations that have come to light.” This move, part of a long conflict between the two exchanges and their founders, caused a kind of bank run, which FTX was clearly not liquid enough to sustain. Hours after FTX inevitably halted all withdrawals, Bankman-Fried announced the news himself: He would be selling FTX to Binance for pennies on the dollar.

Then on Wednesday morning, CoinDesk reported that Binance would likely back out of the deal to buy FTX after reviewing its books. Bloomberg added a little more detail and reported that Binance people didn’t need much time to conclude that FTX was better off dying on its own:

Just hours into their due diligence, Binance executives found themselves staring into a financial black hole — questioning whether the company should bail out its once top rival.

Bloomberg

It just keeps getting worse for Bankman-Fried. Revelations emerged on Wednesday that US regulators are investigating FTX for “misappropriation of client funds” (read: doing Ponzi schemes). Hours later, Semaphore – which, funnily enough, matters Bankman-Fried as one of its largest investors— reported that “most” of FTX’s legal and regulatory teams had quit. If many companies were exposed when Terra or Voyager or 3AC crashed, almost all will be exposed if FTX crashes. In the immediate aftermath of Tuesday’s announcement, investors began freaking out about losing everything they invested, prices fell across the sector, and the entire ecosystem seems scarier than ever.

One reading of this development is that Binance executed a clever leverage game to squeeze and then kill its biggest competitor. They will control over 70 percent of the trading market unless FTX somehow comes back to life. The problem with this is that prospective clients and investors would have to believe that FTX was independently full of shit, and not that the entire edifice of crypto investing was built out of crap in the first place. This game only works on trust, and the sudden revelation that one of the biggest companies in the world is a charade will obviously erode whatever trust people still have in crypto after the losses of the past six months.

If Voyager’s crash helped bring down FTX, imagine what FTX’s crash could do. Binance is one of the last remaining arms of the industry. Binance also won’t say where their headquarters are located, they practically dare to be regulated by how they flout international law, and their own native token is rising. To conclude that the fall of FTX is only an FTX problem is to misread how the industry works. Or doesn’t work.

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