An $8 billion shortfall. A disgraced CEO. A “balance sheet” that read more like an alibi. League of Legends, polycules, defrauded investors and depositors.
The FTX collapse has been nothing short of spectacular.
In less than a year, FTX’s founder Sam Bankman-Fried went from one of the most promising rising stars in crypto to perhaps its most reviled fraud. His partners—and the crypto market in general—have reeled from the blow: In the weeks since details about FTX began emerging, Bitcoin’s price has dropped about 25%, and BlockFi (which FTX acquired earlier this year) has filed for bankruptcy.
What exactly happened? And what does it mean for the future of crypto—and, by extension, crypto investors?
The FTX collapse: A primer
In case you need a refresher on what exactly went down, here are the SparkNotes:
- SBF ascending. Sam Bankman-Fried left Jane Street Capital, a very respected quantitative investing firm, to found Alameda Research—basically a crypto hedge fund. As one of the first firms of its kind, Alameda enjoyed some easy wins through about 2019, when interest in crypto began growing, and Alameda’s competition intensified.
- FTX is born. Bankman-Fried founded FTX, a crypto market-making company, in 2019. The big draw of FTX was that it sold futures-related products and derivatives.
- A crypto star is born. Another big draw was Bankman-Fried himself, who began to develop his brand of the “good guy” in the crypto space. A proponent of “effective altruism,” Bankman-Fried began donating to some very noteworthy causes (and political campaigns) and attracting investment from some of the world’s most prominent investors.
- Here comes the Fed. When inflation began raging, the Fed attempted to combat it by tightening money markets. Investor interest in high-risk, long-tail investments like crypto dwindled. Bankman-Fried, apparently flush with cash, bailed out BlockFi and Voyager, earning himself a “white knight” reputation in the crypto space.
- Unbalanced sheet. Into the fall, Bankman-Fried began behaving erratically—antagonizing Binance CEO Changpeng Zhao and adopting an uncharacteristically aggressive negotiation style. Then, in early November, a possible motive emerged: FTX’s leaked balance sheet, revealing the $8 billion shortfall (among other alarming things).
- FTXodus. In the wake of the controversy, Binance announced that they would sell all of their FTT (FTX’s own coin). FTT tanked, and many FTX investors attempted to liquidate their portfolios. But FTX couldn’t pay.
And now, we’re waiting for all the other shoes to drop. BlockFi’s bankruptcy is the first, but almost certainly won’t be the last. FTX has called in John Ray III, a cleanup specialist famed for mopping up the Enron scandal of the early oughts.
What this means for crypto
- Limited liquidity. Lots of people had a lot of liquidity tied up in FTX. In all likelihood, they’re not going to get their hands on that money for a long time—and when they do, it will probably be only 10 or 20 cents on the dollar. With even less liquidity going around, it will probably be a while before we see another meaningful uptrend in crypto like the one we saw in 2020-2021.
- Fear for institutional investors. We had just started to see a rise in institutional crypto investment when markets started to sag. The FTX debacle and related volatility will scare off conventional and institutional investors, who simply want assets that will reliably appreciate.
- Sets back crypto project funding. It wasn’t just retail investors who had lots of liquidity in FTX, it was major crypto firms like Multicoin Capital, too. As those firms (often in concert with partners like FTX) are primary sources of funding for new crypto projects, it’s likely we’ll see a big drop-off in crypto project funding.
For crypto investors: My general advice is to steer your investments toward more stable investments like Bitcoin and Ethereum, which have entrenched developers, big ecosystems, and are solving real problems. Their prices may be suffering now, but long-term, I’m still very bullish on those two.
It’s going to take a major shift in the macroeconomic environment for more adventurous investments in altcoins to pay anything back. In the near-term, my two cents: Minimize risk, and wait out the liquidity winter.