Bankman-Fried Needs a Crypto Miracle to Rescue FTX


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Collapsed cryptocurrency exchange FTX was a magnet for so-called smart money. Sponsors included the biggest names in finance and venture capital, from BlackRock Inc. to SoftBank Group Corp. and pension funds. Even after this summer’s cryptocurrency crash, the Ontario Teachers Pension Plan described its investment in the company as “lower risk,” because it was where “everyone else” traded.

Now, with an $8 billion shortfall to cover, no one will touch FTX with a barge pole. Rival exchange Binance briefly flirted with a bailout and then walked away, arguing the uncertainty was too great. Sequoia Capital has marked the value of its $214 million stake to zero. Assuming $1 worth of Sam Bankman-Fried’s major deals, according to Bloomberg News estimates, his billions have evaporated.

The fear is understandable, although the previous greed of investors in the face of so many warning signs is not. The reality is that FTX was not a low-risk trading hub, but rather an offshore platform with conflicting lines of business, from trading its own token to offering leveraged trading. Reports allege blurred lines between FTX and an allegedly separate business, Alameda Research, which is now winding up, involving transfers of FTX’s FTT token between the two; Dow Jones said FTX leveraged customer accounts to fund risky bets, citing a person familiar with the matter. The US Department of Justice is investigating the collapse of the exchange, reported Bloomberg News.

But the other deterrent preventing anyone from coming to the rescue is the cryptocurrency market itself, which is looking increasingly fragile.

After all, even a multi-billion dollar hole can be filled if investors see value, says corporate governance expert Garen Markarian. During the darkest hours of the financial crisis, Goldman Sachs Group Inc., a company that Bankman-Fried said he was considering acquiring, received a $5 billion lifeline from Warren Buffett. Aside from the fact that FTX is not Goldman, the demand the exchange can expect for its products in the future appears to be in decline in the long term.

Despite spending lavishly on shameless promotions from sports arenas to star athlete Tom Brady, FTX’s market share has fallen this year. Evaporating demand has shrunk the size of the crypto market from nearly $3 trillion last year to less than $1 trillion today, making it little more than a sideshow compared to major equity markets. , bonds and currencies. Leverage in crypto is still fading: JPMorgan expects a cascade of margin calls and a $13,000 Bitcoin low to come.

At that price, one could imagine even more losses on pick-and-shovel exchanges favored by institutions, such as cryptocurrency mining companies, some of which are going out of business as Bitcoin profits fall and electricity costs rise. . So-called stablecoins, including Tether, are coming under pressure as traders look to exit virtual money for real. Shares of rival exchange Coinbase Inc. have also taken a hit this year.

Therefore, a bet on FTX is not just a bet on the virtual assets that are under its hood, but on the future earnings that can be expected from them. Buffett said earlier this year that he wouldn’t buy all the Bitcoin in the world for $25, because he would need to find the equivalent of a bigger fool to sell it to him.

Crypto markets offer a painful synthesis of the dot-com crash two decades ago and the financial crisis a decade ago. But some elements are new: There is no central bank backing the system, and no one has any way of knowing what will turn out to be Google and what will end up being Pets.com.

Investing in cryptocurrencies is still more like gambling than investing. Two outcomes seem to await those willing to gamble. The lucky “winners” who make a profit pay fees to exchanges so egregious that their owners are the ones who become billionaires. The ‘losers’, like those who back FTX, are likely to lose all their bets. None of this is for the faint of heart, nor should it have been for Ontario retirees. It would take a miracle for FTX and Bankman-Fried to find a savior.

More from Bloomberg’s opinion:

• Everything you wanted to know about cryptocurrencies: Opinion Summary

• The wild west of cryptocurrencies claims another victim: Lionel Laurent

• Crypto Bros needs to stop proving Jamie Dimon right: Tim Culpan

–With assistance from Elaine He and Demetrios Pogkas.

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Lionel Laurent is a columnist for Bloomberg Opinion covering digital currencies, the European Union, and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion