So what happened?
This is still speculation but people are starting to connect the dots.
Here goes my ELI5 (explain like I'm 5) attempt:
Sam started both FTX and another company called Alameda Research.
- FTX was a central crypto exchange, primarily providing spot buys for users (similar to Coinbase, Geminin, Kraken, etc.)
- Alameda Research was primarily an investing arm (like a hedge fund)
On May 8th, 2019, FTX launched an exchange token called FTT.
The value proposition behind the FTT token was:
- Holders of the FTT token would have reduced trading fees
- A percentage of the trading fees would be used to buy back FTT tokens and burn them (remove them from the supply)
Apparently, Alameda was on the brink of collapse like many other firms when Luna spiraled to zero earlier this year.
Alameda was a large holder of the FTT token (major conflict of interest) and if they went under, they would have needed to sell their entire FTT holdings.
This would have flooded the market, dropping the FTT price and hurting FTX in the process.
So instead of letting Alameda go down, FTX came to the rescue with funds, depositor funds! Plugging the hole but creating another one in the process.
Jumping ahead to this week, a financial document was leaked highlighting Alameda's holdings which included $3.66 billion in the FTT token.
After seeing the financial ties of FTX and Alameda, CEO of Binance, CZ, tweeted that they will be liquidating their own 1.2 billion dollars of FTT on the open market.
Alameda pleaded with CZ to let them buy their FTT tokens for $22 per coin off the market but CZ declined.
This news created a bank run for fear of FTX collapsing which ultimately exposed the 9+ billion dollar hole causing withdraws to be promptly suspended.
There was a chance that Binance was going to actually buy FTX and make every user whole but after it was discovered how big the hole was, CZ backed out.
What's next?
Likely more fallout from other companies and investors that used FTX.
If you had funds on FTX, consider them gone.
There will likely be litigation but it may be years before you receive pennies on the dollar for what you had stored on the exchange.
There are talks about FTX trying to raise funds but I'm not holding my breath.
BREAKING NEWS
While writing this, Blockfolio has just announced they are pausing withdraws...
Expect to see more price decline as we discover the additional fallout.
I personally have a $12k Bitcoin target at this point but WHO KNOWS?
Jim Cramer turned bearish on Bitcoin today so that usually means we've bottomed (Ponder Crypto is anti-Jim Cramer if you can't tell)
Why This Betrayal REALLY Hurts.
1. FTX was viewed by outsiders as a legit crypto company.
It wasn't a Mount Gox or shady site that couldn't be trusted. FTX had invested a lot of money in marketing and partnership deals. Crypto was getting put on the map and legitimized through Sam's strategic efforts.
Now with the spotlight on the industry, this little Sideshow Bob Bernie Madoff look-a-like showed his true colors.
2. Sam purported himself as an altruistic philanthropist.
His professed mission in life was to make as much money (legitimately mind you) so that he can give 99% of it away and better society.
3. This is another setback to global crypto adoption
More people will be scared away and leery of entering the space after seeing what were thought to be legitimate companies stealing billions of dollars directly from their clients.
Closing Thoughts
This sucks for everyone involved. But we've been here before, let's find a silver lining in all this.
- We will come out of this stronger. I promise you.
- 2022 will be known as the year of the purge where we got rid of degenerate companies that highlighted the very reason why we should say not to financial centralization.
- Every investor will think twice the next time they are offered a way to earn yield in some way with their crypto.
- Events like this will force people back to the core principles. Not your Keys, Not your Coin. Remember that.
- If you have any crypto sitting on an exchange, take the time and setup a hardware wallet and withdraw your funds into cold storage.
Exchanges should be treated like public bathrooms. You go in, do your business, then come right back out. Do not chill in the bathroom even if there is a couch!
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