FTX's Collapse Is Just the Start

The fall of major crypto entities is a feature, not a bug

Only five months ago, Sam Bankman-Fried, CEO of FTX, formerly the world’s second largest and most celebrated crypto exchange, became the savior of the crypto ecosystem. Acting as what’s known in traditional finance as the lender of last resort, the derivatives whizkid provided emergency loans to many struggling crypto entities that had succumbed to the early 2022 crunch. From then on, he became known as the JP Morgan of crypto.

Titles, however, change rather quickly in the crypto sphere. Just last week, everything seemed normal. Advertisements showing the FTX CEO alongside the company motto of “You in?” filled billboards across the world. Meanwhile, the firm had ostensibly acquired keys to its new offices in Miami, Florida.

Then all of a sudden, after rumors of FTX’s insolvency had been circulating for days on end, the crypto exchange halted withdrawals. This already came after the telltale sign of financial peril: the CEO taking to Twitter to deny whispers of insolvency with fierce undertones.

“A competitor is trying to go after us with false rumors,” Bankman-Fried declared in a now-deleted tweet. “FTX is fine. Assets are fine.”

He was responding to Changpeng Zhao — known informally as CZ — a supposed rival of SBF and owner of Binance, FTX’s primary competitor. Catching wind of the deteriorating state of FTX and its parent company Alameda Research, CZ not only started to unwind his company’s position in FTX’s signature FTT token but announced he was doing so in real-time on social media:

CZ 🔶 Binance @cz_binance

As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4

The market’s response was benign, but this didn’t last long. CZ made a further surprise announcement that Bankman-Fried had asked him for what appeared to be a bailout. “To protect users, we signed a non-binding [letter of intent] … to fully acquire and help cover [an FTX] liquidity crunch,” CZ tweeted. “We will be conducting a full DD [due diligence] in the coming days.”

Given the shaky rivalry between the two CEOs, the chance of a deal already remained slim. But when an anonymous source tipped the crypto media firm CoinDesk that Binance was “highly unlikely” to follow through on its tentative FTX rescue upon “seeing its books,” the downfall of SBF’s empire appeared to be assured.

And indeed it was. After helping to plunge his competitor’s proprietary crypto token into oblivion, CZ then pulled the plug on an FTX rescue.

Since then, Bankman-Fried has seen his net worth collapse from $26 billion to under $1 billion (to $3 bizarrely) to $0 and has filed all three companies for bankruptcy without any hope of recovery. Amongst much speculation of a getaway, he now appears to be “under supervision” alongside other FTX executives by Bahamian authorities.

Source: Bloomberg / Firefox Capital

His former investors will now feel the pain, with the likes of venture capital firm Sequoia marking its FTX investment “down to zero” — while also revealing it had received investment from SBF himself! It will be even worse, though, for football star Tom Brady and his supermodel ex-wife Gisele Bündchen, who will see their multi-million dollar equity investment vanish.

Anyone aware of previous crypto cycles — say, long-term readers of Concoda — will know the most prominent entities like Mt. Gox and Silk Road always come crashing down with an almighty wallop. The gradual then sudden collapse of Sam Bankman-Fried, FTX, and Alameda is not surprising, nor is it anything new. It’s a feature, not a bug.

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That leads us to question who bails out CZ when he inevitably makes the same blunders as his former rivals. Without the aid of a lender of last resort (providing that Tether again fails to show interest or is incapable of providing emergency funds), Binance will ultimately grow greedy enough to set in motion a series of botched missteps, leading to a rather predictable destiny. And, of course, that’s unless the present contagion doesn’t threaten Binance’s finances beforehand.