The Wild West of Crypto Claims Yet Another Victim


Sam Bankman-Fried has enjoyed similar media treatment as walking on water in the past. Even amid the brutal crypto sell-off, his FTX exchange was hailed as the buyer of last resort amidst the doom. His geeky image, alleged philanthropic motivations, and crude online jokes softened the edges of a billionaire whose business is risky crypto trading, much of it illegal in the US. But he has been found wanting in the only three things that matter in the US. finance: liquidity, liquidity and liquidity.

Rival billionaire Changpeng Zhao of Binance is buying it. Zhao had earlier announced plans to sell Binance’s $530 million stash of FTX-managed FTT token. The combination of selling pressure in an already battered and illiquid crypto market, coupled with vivid memories of past crashes in the space, turned into an existential crisis for FTX. About $1 billion was withdrawn from FTX in a week, according to Kaiko analyst Conor Ryder.

This is corporate blood sport on a level not even cryptocurrencies are used to. An exchange billionaire appears to have triggered a run on a rival crypto king, forcing his peer out of business. That this was initially done in the name of transparency is doubly ironic considering Binance’s own controversies and lack of an official headquarters. By verbally getting rid of a token that Binance owns on a large scale, the panic-selling effect was completely predictable. Bankman-Fried tried in recent days to reassure investors that all was well with FTX via Twitter, which was not very reassuring from someone who was once without irony compared to John Pierpont Morgan.

Binance might appear to have emerged as the obvious victor in this game of thrones, with a combined potential market share of over 70% for Bitcoin trading. But the speed at which investors freaked out, and the extent to which the FTX token was traded as a currency defended from speculative attack, point to a great deal of mistrust and little transparency in this market. Given Binance’s previous exposure to collapsed tokens, reported sanctions violations, and a crypto market hit by evaporating confidence, regulators will have plenty to keep up the pressure.

Furthermore, this episode has taught a costly lesson in counterparty risk. The question is not just who owns what or what lines of business are blurring, but what protections are in place for investors posting funds on platforms located in offshore jurisdictions and offering so many products with potential conflicts of interest. (Answer: very few). Even the term “exchange” is not entirely accurate as it gives the image of a traditional regulated trading venue, even though the hodgepodge of token listings, proprietary coins and trading services does just the opposite. So when fear strikes, money flees.

And at times like this, even Bankman-Fried’s enormous wealth and carefully honed public image failed to reassure them, because they were so tied to cryptocurrencies. Exchanges are moneymakers: commissions are made both down and up, but the scale of the recent defeat has been brutal. FTX’s estimated share of Bitcoin trading has fallen to around 3% from 16% in about six months, according to James Butterfill of digital trading firm CoinShares.

This goes beyond an exchange. While CZ has benefited from the Bankman-Fried woes, the big picture here is one of a fight for scraps in a market that soared to a peak of nearly $3 trillion and then dropped by two-thirds. Demand has evaporated, punters are burning their fingers, and institutional investors are falling short on names like Three Arrows or Celsius. Rising interest rates and a war economy have driven away the crowds that speculative trading depends on, regardless of what Dogecoin fans think.

The optimistic view is that this sector is on the road to maturity and is getting stronger with each collapse. After all, even this latest panic has been absorbed. But after several boom-and-bust cycles, it’s still not entirely clear whether we’re years, decades, or eons away from a use case beyond commerce. Crypto miners who got into debt go bankrupt. Regulators are cracking down on social media influencers, unregistered securities, and dark web shoppers who hide Bitcoin in popcorn cans. Central bank digital currencies are in the works, which could increase competitive pressure.

Whatever happens next, the most valuable lesson Bankman-Fried is teaching investors is not about philanthropy or a JP Morgan-style empire, but about the risk of relying too heavily on trading venues in a market. like cryptocurrencies. The latest sell-off, combined with increased regulation and recession, will be a test of survival. And the next time a major exchange faces a liquidity crisis, the only valid rescuer might be a company that looks like the real JPMorgan and not its crypto equivalent.

More from Bloomberg’s opinion:

• Everything you wanted to know about cryptocurrencies: Opinion Summary

• Musk-powered Dogecoin jump is a Twitter warning: Lionel Laurent

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

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.

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