Deep breaths and let’s start. The leading topic for this blog is trust. As consumers, we want to be able to trust the organizations we buy from, invest in, or the bank to put our money. Trust is what allows us to disconnect from the worries about the quality of the product and the safety of our investment.
I had never trusted crypto, and I have stated my reasons in this article here. I wrote about Celcius holding in this article and how it collapsed. Here is an excerpt.
Celsius suspended all withdrawals from its lending platform. CEL (Celsius) plummeted 70% after hours in a single hour. CEL’s major sell-off came amid a giant selloff that saw crypto’s total market capitalization plunge to less than a trillion, or more than two-thirds shy of its all-time high of $3 trillion, while Bitcoin dropped to levels not seen since 2020. For those who remember the 2008 “Lehman moment”, a shattering of confidence triggered by plunging asset prices, liquidity freezing up, and billions of dollars wiped out in a few scary weeks.
The Crypto nightmare did not end with Celsius, hedge fund Three Arrows Capital and Tera Luna dented the crypto image. FTX collapse brings crypto to the same junction. FTX the second largest crypto exchange (by volume) in the world stopped its customers from withdrawing money. Its valuation went down from $32B to BANKRUPT. Binance, the world’s largest crypto exchange decided to step in to help, only to realize days after that they were stepping into something criminal and way messier than they anticipated. Binance withdrew its offer to buy FTX after “corporate due diligence”
Thanks for reading the Products and Businesses (PB) Newsletter! Subscribe for free to receive new posts and support my work.
What the hell happened?
First let us understand Four things: SBF, Alameda, FTX, and FTT.
Sam Bankman-Fried (SBF)
The poster child of crypto for the better part of six months. He founded FTX — the now-bankrupt trading platform and Alameda. He also was one of the richest individuals in crypto (until Nov 7th). He was even heralded for his willingness to jump in to aid ailing crypto firms — especially when he extended a helping hand to Three Arrows Capital and Celsius during the Luna crash.
Founded in 2017 by SBF as a trading company. It is FTX’s sister company and a hedge fund. Alameda’s balance sheet drove FTX to bankruptcy. Alameda is a heavy DeFi (Decentralized Finance) investor. Data from Crunchbase suggests that Alameda made close to 185 investments over the past five years, with Fordefi coming across as one of them.
It is a crypto platform or a crypto exchange based out of the Bahamas. It was founded by SBF in 2019. FTX was funded by Temasek, Softbank, and Sequoia capital. In May 2022, FTX laughed at its stock trading functionality. FTX had its own token FTT.
FTT token is FTX’s native token. It is a utility token that ensures customers get a discount on the trading fee. It is also an exchange token, allowing users to put FTT as collateral against future positions. FTT is the primary reason that led to the bankruptcy of FTX. I will explain how.
How do all these four names interacted with each other? The flow below explains how money moved from FTX to Alameda
As I mentioned Alameda is a hedge fund that makes money based on price volatilities on cryptos. Alameda needs money to place hedges. It got its money from FTX, as FTT. These tokens belonged to customers and Alameda used them to make trades (short or long). The reason Alameda had easy access to FTT was SBF. In fact, SBF initiated interest-free loans.
On June 30th, 2022, Alameda’s FTT token asset value was $6.1B but the circulating supply of FTT was only $3.6B. From the above flow, we can see these are tokens that were printed but not put in the market to maintain price parity. This means Alameda controls FTT’s 75% total supply (NOT CIRCULATING SUPPLY). This allowed Alameda to take loans against the entire supply and distribute these loans to FTX’s directors and SBF himself.
Joint ownership of Alameda and FTX allowed SBF to make these transactions. How can we say this, well look at Alameda’s holdings distribution chart below 👇👇
Timeline leading to the debacle
Nov 2: On November 2, Ian Allison at CoinDesk published a leak revealing that much of Alameda’s $14.6 billion in assets were parked in a digital token created by FTX, called FTT.
Nov 6: CZ (founder of Binance) said on Twitter that Binance would be liquidating its FTT holdings, which it received after exiting its stake in FTX last year.
Nov 8: SBF announced that FTX had reached a “strategic transaction” to hand FTX over to Binance (but not FTX US). Zhao said Binance had signed a non-binding letter of intent to buy FTX, pending due diligence.
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.— CZ 🔶 Binance (@cz_binance) November 8, 2022
Semafor reported on November 8 that FTX had tried to get a bailout from Silicon Valley and Wall Street investors before resorting to Binance.
Nov 9: Binance backs out of the deal, leaving the crypto market players to fend for themselves.
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.— Binance (@binance) November 9, 2022
Press Release pic.twitter.com/rgxq3QSBqm— FTX (@FTX_Official) November 11, 2022
FYI – Other important information to know about FTT impact.
Image 1: Impact of FTT on CMI
Image 2: SBF investments (Source Fortune)