Crisis in the Cryptosphere
11/14/2022
Bitcoin was created in 2009. By 2021 the global market of cryptocurrencies was valued at nearly $3 trillion. During that 12-year period crypto demonstrated extraordinary volatility. Over the past year alone the value of the global cryptocurrencies market has fallen back to around $825 billion. For context, that is about one third of the current market cap of Apple.
At the start of November, the world’s third largest crypto exchange, FTX was valued at $32 billion. Investors included ‘elite’ institutions like Sequoia and Blackrock. During crypto market turmoil earlier this year FTX even came to the rescue of other crypto exchanges like BlockFi. FTX developed a grandiose marketing presence. Its logo was on MLB umpires’ uniforms, Super Bowl ads, and the Miami Heat arena. FTX’s 30-year-old founder and CEO, Sam Bankman-Fried, was seen as a leader in the crypto space. Fortune featured him on the cover of their August/September 2022 magazine and suggested he could be the next Warren Buffett! That would-be title vanished as FTX imploded last week. Bankman-Fried has had to step down as CEO, and FTX has filed for bankruptcy. The new CEO of FTX is John Jay Ray III, who led Enron through its bankruptcy proceedings.
Word about FTX’s finances broke on November 2nd with revelations about its apparent dependency on assets held by its trading affiliate, Alameda Research. The dominoes then began to fall quickly. Most of Alameda’s $14.6 billion of assets were in a cryptocurrency called FTT issued by FTX. On November 6th, Binance, the largest crypto exchange, announced it was selling $500 million of its FTT holdings. This, along with fear that the balance sheets of FTX and Alameda were intertwined, led the price of FTT tumbling from about $22 to just over $3 within a day. FTX was forced to freeze users’ ability to withdraw funds.
FTX was then stuck in an overleveraged position with a multi-billion dollar balance sheet hole. Bankman-Fried sought help from Binance, its lender of last resort. After conducting due diligence, Binance refused to work a deal. FTX failed and cryptocurrencies tumbled further. For example, Solana, which was also held by Alameda, fell by over 50%. Even Bitcoin was not immune as its value dropped back to its late 2020 level.
FTX had been seen as a trustworthy, stable player in the crypto ecosystem. Its collapse serves as a warning of the risk of systemic fragility within crypto and related areas of emerging financial technology. While crypto nonbelievers have reveled in schadenfreude, others who entrusted FTX with their crypto deposits, are now creditors at the mercy of the bankruptcy court.
The FTX story might not be fully told. The bankruptcy process could reveal further details which impact confidence in the crypto sector. Moreover, the SEC and DOJ are now involved. The regulators may affect the direction of crypto far into the future. We are watching from the sideline to see whether the turmoil of last week eventually causes the cryptosphere to emerge stronger, or crypto fades to be remembered only as an overhyped fad.
Cam Simonds
