Notes 12/23: SBF’s Bail, Bitcoin Price, and Buffett’s Crypto Play

It took less than two months for former FTX CEO Sam Bankman-Fried (SBF) and his merry band to turn from heroes to villains. Thanks to his generous marketing spend and numerous public sponsorships and appearances, SBF had become the face of cryptocurrencies.  

Now he is a symbol of its excesses. After spending the night in a Bahamas prison and being extradited to the United States, SBF was released on bail yesterday and is currently back in his parent’s home in California.  

SBF’s travel has been restricted to parts of Northern California and New York and he is supposed to always wear an electronic ankle bracelet to track his movements. Caroline Ellison and Gary Wang, his former colleagues and housemates, are cooperating with authorities and are also facing the prospect of jail time.  

SBF’s bail amount is widely being reported as $250 million. But that figure is a promise to pay bond – an unsecured surety arrangement in which a third party agrees to pay the full amount if the defendant fails to appear for their court appearance. In SBF’s case, the bail is cosigned by four other people, including one non-family member, and is backstopped by, among other things, his parent’s Stanford campus home that is reported to be worth $4 million.

The Next Shoe to Drop?

Binance CEO Changpeng Zhao must be watching SBF’s public travails with interest. As I mentioned earlier, the fall from grace for SBF and his team took a very short time.

How long will it take for Binance?

My guess is not very long. The recent spate of withdrawals at Binance was a dress rehearsal for the actual event. Just as his former mates turned against him, it is not difficult to imagine SBF executing a similar maneuver. In a CoinDesk interview, Andrew Thurman, analyst at Nansen, estimated that it will take approximately $12 billion worth of withdrawals to break Binance.

But that estimate relies on figures peddled by the exchange about its trading volumes and valuations. Binance is well-known for faking volumes in crypto. The exchange’s liabilities are also a black box. Tether, a controversial stablecoin that is used to manipulate prices, constitutes some of the biggest trading volumes at Binance. The stablecoin has become increasingly unstable amid crypto’s constant turmoil, meaning the value of Binance’s assets could crash very quickly.

Bitcoin and Crypto Markets: Waiting for Capitulation?

Waiting for Tonight” was a famous song about the new year by Jennifer Lopez at the turn of this century. The crypto twist is that analysts and observers of its ecosystem are waiting for capitulation in crypto market prices after the new year.

Prices for bitcoin and the broader ecosystem of cryptocurrencies have moved sideways in the last couple of days. Bitcoin price continues to vacillate in the $16,000 to $18,000 range. Analysts expect a further move down to $13,000. Ethereum’s ether was sliding downwards yesterday. It has recovered to $1217.66, as of this writing, but continues to trade in a narrow band, indicating further movement up ahead.

A Gloomy Outlook

Traders have ignored positive economic data and Fed statements in anticipation of another catastrophic event within crypto. SBF’s next court hearing date is set for Jan. 3, meaning we may not see much action, only words, in crypto markets until after the new year.

Meanwhile, crypto’s fundamental indicators are not looking good. Transaction values and volumes are teetering downwards on bitcoin’s blockchain. Miners in its ecosystem are filing for bankruptcy because they are unable to eke out profits from bitcoin’s declining price.

For those who point to macroeconomic indicators, the triple whammy of expected Fed interest rate hikes, a labor market that refuses to cool down, and talk of an economic recession that slows growth in 2023 is reason enough for gloom.

The Clairvoyant of Crypto?

The crypto PR machine seems to be running out of ideas. So, they have dragged legendary investor Warren Buffett into the crypto conversation.

Apparently, he is interested in investing in Binance. This, even though Buffett has been a constant critic of cryptocurrencies as an asset class since their earliest days. He famously declared earlier that he does not invest in businesses he does not understand. And that understanding of businesses is predicated on tangibles like cash flow and income statements. Cryptocurrencies do not produce either; they are simply pieces of code parading as an asset class.

Buffett’s investing strategy also relies on caution and patience, both of which are in short supply in the momentum driven trading of crypto markets.

An example is his approach to technology companies. Despite stratospheric hype and valuations, the Oracle of Omaha took his time in embracing technology stocks, putting money into Apple – by then the world’s most valuable company – only during the first quarter of 2016.   Why, then, would he choose to invest in a company duct taped together by a patchwork of unregulated entities?

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