FTX & naked swimmers in a bear market


Warren Buffet, who has a way with words, said only when the tide goes out can you see who has been swimming naked. During 2022 the tide has been out in a tough bear market and FTX has been swimming naked. So I decided to dig in and try to get some perspective amid all the clickbait noise.

First, in case you need a news 101,  Bankman-Fried’s FTX is a big cryptocurrency exchange on the brink of collapse amid liquidity concerns and allegations of misused funds. Bankman-Fried told investors that Alameda owes FTX about $10 billion, which FTX loaned to Alameda using customer deposits. Before making the loan, FTX had just $16 billion in assets, meaning it lent out more than half of its assets.

Headlines blare comparisons with all the big past blowups, so I started by looking at total amounts involved. I was surprised to learn that Madoff was bigger than Lehman. The big difference is that Lehman was a systemic risk, meaning all counterparties were at risk.

In all cases,  the reputational loss is massive. People like Sam Bankman-Fried fooled supposedly smart investors such as Sequoia Capital. And market prices fall, in some cases close to zero such as the  FTT token (which is akin to equity in FTX).

Re the skullduggery between Binance and FTX, this is a tale of two sharks and one wins. I was going to put Binance in the Cui Bono (who wins) category but decided on a new category which is Wait and See.

First Cui Amisit (who loses):

  • FTX shareholders such as Sam Bankman-Fried and Sequoia Capital
  • FTX Depositors aka traders who held crypto at FTX. $10 billion is not big compared to other big past blowups, but this is lots of people losing their life savings – ugh. But Wait and See, some money was recovered from Madoff and Mt. Gox.
  • Altcoin Investors. Even crypto blue chips like Bitcoin/BTC and Etherum/ETH took a hit but some crypto have been hammered and may not recover. 

Next Cui Bono (who wins):

  • Legacy Finance. An old fashioned bank or regulated exchange looks good compared to FTX. Oh and Legacy Finance assets may be moving from bear to bull market.
  • Coinbase. A fully regulated cryptocurrency exchange looks good compared to FTX.
  • Non custodial wallets, where an exchange cannot take your assets, looks like the right technology if you think the future will be self regulated

In the Wait and See category:

  • Binance. Will they win as last man standing? Or will traders shun their risk as being too much like FTX?
  • Crypto blue chips like Bitcoin/BTC and Etherum/ETH Bitcoin. Is this end of bear market capitulation or sign of a bubble popping?

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