In a now famous Rolling Stone description of Goldman Sachs after the 2008 financial crisis, journalist Matt Taibbi compared the Wall Street titan to a “giant vampire squid wrapped around the face of humanity.” FTX may not have the same footprint as Goldman Sachs but its high profile within crypto has ensured that tremors of its collapse are still being felt in the crypto ecosystem.
Notable venture capitalists have written down the value of their investments in the exchange to zero. Solana, a Layer 2 solution on Ethereum blockchain, said it has been affected by the pause on withdrawals at FTX because it had $1 million locked away there.
Crypto lending firm BlockFi was rescued from a potential bankruptcy filing in June by Sam Bankman-Fried (SBF), FTX’s CEO. If a report published this morning in the Wall Street Journal is true, the firm might have to retread its steps.
The FTX collapse is also being blamed for a massive discount in the price of Grayscale Bitcoin Trust (GBTC) shares. GBTC is the world’s biggest investment vehicle for bitcoin and its discount to net asset value (NAV) – the difference between the price of bitcoin to GBTC’s holdings per share – widened to almost 42% yesterday.
GBTC’s unique structure – it is a closed end trust masquerading as an ETF – makes it difficult identify the exact reason for price disparity. But analysts say that FTX’s collapse may have made investors bearish on its prospects of becoming an ETF in the future.
Their pessimistic outlook is based on the blowback that crypto might face from regulators after the FTX unraveling. In better times, SBF’s cherubic face and frizzy curls had become a familiar face in Washington crypto lobbying circles. He testified regularly regarding crypto regulations, sitting alongside experienced and hardened professionals to make his case for a new asset class. He had become one of the biggest political donors in the last election cycles, spreading his crypto profits across the aisle for the cause of crypto.
Things are different now. A regulatory noose is tightening around FTX with authorities and authorities in the US and Bahamas, where FTX is headquartered, cracking down on it. The exchange’s founders were reported to be considering fleeing to Dubai, which does not have an extradition treaty with the United States, to escape regulators. [An interview in the New York Times, however, gives no such indication].
Signs of Life
SBF hasn’t lost hope. He is still tweeting, sometimes cryptically, and was interviewed by the New York Times. The Wall Street Journal reported that he was trying to raise cash from investors to cover the $8 billion hole at his exchange. Lest you are scandalized by his actions, SBF is simply following precedents from last year.
Grayscale, the firm behind GBTC, may also make it through this winter. The investment firm has weathered depressions in GBTC price in the past. That it holds one of the biggest stashes of bitcoin – a volatile asset that has shown a propensity to climb high – and is making substantial money as the trust’s administrators may help it survive this time around as well.
The big guns of crypto – major crypto exchanges and stablecoins like USDC – also seem to have survived the FTX crisis without much damage to their books. In fact, Coinbase briefly benefitted from FTX’s collapse after an analyst suggested that customers might defect to its trading platform. USDC yesterday announced that it was available on Apple Pay. But that bit of news was balanced by an investment in FTX, worth $10.6 million, that has contributed to “materially lower” projections for its revenue.
A Crypto Industry Recovery Fund
Binance CEO CZ seems to have taken on SBF’s mantle of saving the crypto industry. He attempted to stave off FTX’s bankruptcy by purchasing it. Then he promoted transparency through Proof of Reserves. His latest suggestion is to set up an “industry recovery fund to help projects who are otherwise strong, but in a liquidity crisis.”
The suggestion was made through a tweet. No further details were provided about how to identify “strong” projects. CZ’s tweet also pulls the covers off crypto’s liquidity problem and its ecosystem of tokens that have little utility (or are still under construction) but have still racked up make believe valuations amounting to millions, even billions, of dollars. Such tokens and their platforms are susceptible to bank runs that harm investors.
Bloomberg columnist Matt Levine has likened the fund to a central bank for crypto that acts as a lender of last resort. It is admirable that crypto, an asset class that blazed into prominence as an alternative during a financial crisis that kneecapped the global economy, is attempting to set up a new financial infrastructure for the little guy. Unfortunately, the new infrastructure, more than incidentally, resembles the old one. And we all know what happened when a bank run ensued during the financial crisis. Only the firms deemed “Too Big to Fail” survived the hellscape. The current reckoning in crypto seems to be churning out a similar result.