No one is going to use barge poles for FTX as they currently need to make up an $8 billion shortfall. After offering a temporary bailout, rival exchange Binance walked away, arguing there was too much uncertainty. Sequoia Capital has written down the value of its $214 million stake to zero. According to Bloomberg’s news estimates, if Sam his bankman his Freed’s main business is worth $1, his billions will evaporate.
The fear is understandable, even if investors’ previous greed in the face of so many warning signs had not. In reality, FTX was not a low-risk trading hub, but an offshore platform with competing lines of business, from operating its own tokens to offering leveraged trading. The lines between FTX and what is believed to be a separate business, Alameda Research, which is currently being dismantled, are reportedly blurred, with FTX’s token FTT being transferred between the two. Dow Jones said, citing people familiar with the matter, that FTX used customer accounts to fund risky bets. Bloomberg News reports that the U.S. Department of Justice is investigating the exchange’s bankruptcy.
But another deterrent that prevents anyone from coming to the rescue is the increasingly fragile-looking cryptocurrency market itself.
Ultimately, even billions of dollars can be filled if investors find value, says corporate governance expert Galen Markarian. During the darkest time of the financial crisis, Goldman Sachs Group (a company Bankman-Fried claimed to be considering buying) received his $5 billion lifeline from Warren Buffett. Aside from the fact that FTX is not Goldman, it looks like the long-term decline in demand the exchange can expect for its product in the future.
FTX’s market share has plummeted this year, despite spending lavishly on shameless promotions from sports stadiums to star athlete Tom Brady. Evaporation of demand has shrunk the size of the cryptocurrency market from nearly $3 trillion last year to less than $1 trillion today, making it a sideshow relative to mainstream stock, bond, and currency markets. It’s not too much. Crypto leverage is still unleashed. JP Morgan expects Bitcoin to hit a low of $13,000 amid a flurry of margin calls.
At that price, profits from bitcoin will decline and as electricity prices rise, we expect to see even more losses in the pick-and-shovel trade favored by institutions such as crypto mining firms. So-called stablecoins are under pressure as traders seek to part with cryptocurrencies for the real thing. Rival exchange Coinbase’s shares have also plummeted this year.
A bet on FTX is therefore not a bet on the virtual assets under its hood, but a bet on the future profits that can be expected from them. Earlier this year, Buffett said he would not buy $25 for Bitcoin around the world.
The cryptocurrency market presents a painful consolidation of the dotcom bankruptcy of 20 years ago and the financial crisis of 10 years ago. But there are some new elements. There is no central bank behind the system, and no one has any way of knowing what will become Google and what will become Pets.com.
Investing in cryptocurrencies is more like gambling than investing. There seem to be two outcomes for those willing to take the punt. Lucky “winners” who make a profit pay commissions to unscrupulous exchanges that make the owners of the exchange millionaires. “Losers” like those backing FTX can lose all their bets. None of this is for the faint of heart, nor is it for Ontario retirees. It takes a miracle for FTX and Bankman-Fried to find a savior.
Bloomberg Opinion Details:
• Everything You Wanted to Know About Crypto: Opinion Wrap
• Crypto Wild West Claims Yet Another Victim: Lionel Laurent
• Crypto Bros need to stop proving Jamie Dimon right: Tim Culpan
— With help from Elaine He and Demetrios Pogkas.
This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
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