Is the Crypto Market a House of Cards?
The recent collapse of FTX and Alameda Research has brought the fortunes of their founder, Sam Bankman-Fried down from a staggering $32bn to $0 in less than two weeks. Sam was a big boy who is only 30 , a major donor to the democrats and an influential figure in the US congress on matters relating to digital assets. He is reportedly very close to the SEC chairman, Gary Gensler.
However, our concern today is more about the fate of millions of retail investors who suddenly found out they cannot withdraw their investments from FTX. The trigger was a story by CoinDesk that revealed that Alameda Research, the quant trading firm also run by Bankman-Fried, has made crypto bets worth $5bn using FTT, FTX native token. Many exchanges have their tokens , the value proposition is that holding such tokens will allow you enjoy discounts on your transactions on the exchange. Holders of FTT can use them as collateral on FTX and they are also regarded as VIPs. There are about 250million FTTs in circulation and price was as high as $80 back in September 2021.
With FTT , Sam was able to move funds to Alameda Research , a hedge fund managed by his on and off girlfriend , Caroline Ellison(28). Alameda reportedly made huge bets with the funds, which include asset belonging to other FTX users. Losses on these bets eventually created a deep hole on Alameda’s Balance Sheet and FTX ultimately, being a sister company. The hole got deeper as investors started disposing their FTT holdings, which made the price to fall from $18 on November 8, 2022 to about $1.49 currently. Meanwhile those bets were collaterized by FTT, therefore as FTT was losing value, the bets were forced to close in losses as their collateral was no longer adequate.
FTX eventually filed for Bankruptcy on November 11, 2022 and also stopped all withdrawals on their platform. Leaving many innocent people who have their hard earned funds trapped on FTX in limbo. Many have their funds in USDT and other stable coins whose prices are supposed to track US dollar 1 for 1. Meaning that they were not really speculating but still lost heavily to FTX demise. According to documents filed in the bankruptcy proceedings, FTC has a hole of about $8bn in their balance sheet , but customers are claiming they lost much more than this.
The dramatic fall of FTX is the latest addition to other colossal failures in 2022, Terra Luna and Celcius already come to mind, both causing investors to lose billions of dollars. Therefore people are wary of leaving funds on exchanges at the moment, with many withdrawing into private wallets or leaving cryptos all together. If an FTX with a founder who romances top politicians , investors and celebrities could fail so woefully, who then is safe?
Our take is that more failures are expected, especially now that the US SEC is finally ready to focus its search light on the crypto space. There are gaps in many areas, from Initial Coin Offering (ICO) to Initial Dex Offering (IDO) where people come out to raise funds for questionable projects, but still successfully get huge sums of money by taking advantage of investors greed. The other aspect is market price manipulation on various exchanges, we have seen some coin price rising by as much as 4000% in a single day under various pump and dump schemes.
The question now is whether we are about to see the end of cryptos? Our answer is NO, however , as Christ said, ” Unless a kernel of wheat falls to the ground and dies, it remains only a single seed. but if it dies, it produces many seeds” (John 12:24). The Crypto market is crying for regulations and when regulations come, many of the projects you see around will not survive the clean-up. Therefore, our strategy is to wait for the purge, which will drop prices far below what we see today. This will however leave only the good players on the field.
The value proposition of crypto and blockchain technology remains appealing, a decentralized and borderless solution that eliminate the need for middle men or central authorities in various aspects of human life. The technology is trustworthy but the affairs of human beings around the technology must be regulated. In the end, the brave will be rewarded.