An attendee wears a “Will Work for NFTs” T-shirt during the CoinDesk Consensus 2022 Festival in Austin, Texas, US, Thursday, June 9, 2022. The festival showcases all aspects of the blockchain, crypto, NFT, and Web 3 systems, and their broad impact on commerce, culture and societies.
Jordan Vonderhar | Bloomberg | Getty Images
A year ago this week, investors were touting Bitcoin as the future of money and Ethereum as the world’s most important developer tool. The irreplaceable tokens were exploding, Queen Bees It traded at a record price and the Miami Heat were in the NBA in their first full season at the newly renamed FTX Arena.
As it turns out, that was the heyday of cryptocurrency.
In the 12 months since then Bitcoin The two largest cryptocurrencies exceeded $68 thousand, lost three-quarters of their value, and collapsed along with the riskiest technology stocks. The industry, which was previously valued at around $3 trillion, is now around $900 billion.
Rather than acting as a hedge against inflation, which is approaching a 40-year high, bitcoin has proven to be another speculative asset that explodes when evangelicals stand behind it and plummets when enthusiasm thaws and investors are scared.
And the $135 million that FTX spent last year in a 19-year deal with The Heat? A cryptocurrency exchange with naming rights is poised in the history books along with another brand that once had its logo on a sports facility: Enron.
In the blink of an eye this week, FTX sank from a $32 billion valuation all the way to bankruptcy as liquidity dried up, customers demanded withdrawals, and rival exchange Binance tore up its non-binding agreement to buy the company. FTX founder Sam Bankman Fred admitted Thursday that he’s “running out.” On Friday, he resigned as CEO.
“Looking back now, it’s clear that the excitement and asset prices have been getting ahead of themselves and trading well above any underlying value,” said Katie Talati, director of research at Arca, an investment firm focused on digital assets. “As the downturn was rapid and violent, many declared digital assets dead.”
Whether crypto is doomed forever or will eventually rebound, as Talati predicts, the bloodbath of 2022 exposed the industry’s many flaws and served as a reminder to investors and the public that financial regulation exists. Bankruptcies have come fast and furious since the middle of the year, leaving customers with crypto accounts unable to access their funds, and in some cases scraping back pennies from the dollar.
If this is indeed the future of finance, it looks rather bleak.
Cryptocurrency was supposed to bring transparency. All transactions can be tracked on the blockchain. We didn’t need central institutions – banks – because we had digital ledgers to serve as the only source of truth.
This combo is gone.
Michael Saylor, CEO of MicroStrategyIt is a technology company that owns 130,000 bitcoins. “The industry needs to grow and regulators are coming into this space. The future of the industry is registered digital assets that are traded on regulated exchanges, where everyone has the investor protection they need.”
Saylor was speaking on CNBC’s “Squawk on the Street” as the demise of FTX disrupted the cryptocurrency market. Bitcoin sank to a two-year low this week, before recovering on Thursday. Ethereum It also fell, and Solana, another popular coin used by developers and promoted by Bankman-Fried, fell by more than half.
Cryptocurrency-related stocks also suffered. Cryptocurrency exchange Coinbase plunged 20% over two days, while RobinhoodThe trading app, with Bankman-Fried as one of its biggest investors, has fallen 30% over the same period.
There was already a lot of pain to go. Last week, Coinbase reported a revenue decline of more than 50% in the third quarter of the previous year, and a loss of $545 million. In June, the cryptocurrency exchange reduced 18% of its workforce.
“We are actively updating and evaluating our scenario plans and preparing to reduce operating expenses further if market conditions worsen,” Alicia Haas, CFO of Coinbase, said on the November 3 earnings call.
How did you start
The overdraft began in late 2021. That’s when inflation started rising and it raised concerns that the Federal Reserve would start raising borrowing costs when the calendars turned. Bitcoin fell 19% in December, as investors traded in assets considered safer in a turbulent economy.
The sell-off continued in January, with Bitcoin down 17% and Ethereum down 26%. David Marcus, Former Head of Cryptocurrency at Facebook Parent deadUse a phrase that will soon enter the lexicon.
“During crypto winters, the best entrepreneurs build the best companies,” Marcus wrote in a January 24 tweet. “It is time again to focus on solving real problems versus pumping out tokens.”
The crypto winter hasn’t actually happened for a few months. The markets stabilized for a while. Then, in May, stablecoins became officially unstable.
A stablecoin is a type of digital currency designed to maintain a 1-to-1 peg to the US dollar, acting as a kind of bank account for the cryptocurrency economy and providing a healthy store of value, unlike the volatility seen in Bitcoin and other digital currencies.
When TerraUSD, or UST, and its sister symbol Luna dove launched under the $1 mark, a different kind of panic occurred. The link is broken. Confidence evaporated. More than $40 billion of wealth was wiped out in Luna’s collapse. Suddenly it seemed as if nothing was safe in cryptocurrencies.
The leading cryptocurrency has collapsed, with bitcoin dropping 16% in one week, causing it to more than halve from its peak six months ago. On the macro front, inflation has shown no sign of abating, and the central bank has remained committed to raising interest rates as much as is needed to slow the increase in consumer prices.
In June, the bottom fell.
Lending platform Celsius has temporarily suspended withdrawals due to “extreme market conditions”. Binance has also halted withdrawals, while crypto lender BlockFi has cut 20% of its workforce after more than five times since the end of 2020.
Prominent crypto hedge fund Three Arrows Capital, or 3AC, has defaulted on a loan of more than $670 million, and FTX has signed a deal that gives it the option to buy BlockFi at a fraction of the company’s last private appraisal.
Bitcoin had its worst month ever in June, losing nearly 38% of its value. Ether has fallen by more than 40%.
Then came the bankruptcies.
Singapore-based 3AC filed for bankruptcy protection in July, just months after it was revealed it had $10 billion in assets. The company’s risky strategy included borrowing money from across the industry and then going around and investing the capital in other, often start-up crypto ventures.
After the fall of 3AC, crypto brokerage Voyager Digital wasn’t far behind. That’s because 3AC’s massive deficit was on loan from Voyager.
“We strongly believe in the future of the industry, but the prolonged volatility in the cryptocurrency markets, and the default at Three Arrows Capital, requires us to take this decisive action,” Voyager CEO Stephen Ehrlich said at the time.
Next was Celsius, who came for protection from Chapter 11 in mid-July. The company was paying customers up to 17% interest for storing their cryptocurrency on the platform. It will lend those assets to counterparties who are willing to pay very high rates. The structure collapsed as the liquidity dried up.
Meanwhile, Bankman-Fried was making himself an industry savior. The 30-year-old who lives in the Bahamas was ready to capture the carnage and boost the industry, claiming that FTX was in a better position than its peers because it stashed cash, kept overheads low and avoided lending. With his net worth ballooned on paper to $17 billion, he himself bought a 7.6% stake in Robinhood.
SBF, as it is known, has been dubbed by some as the JPMorgan of crypto. CNBC’s Kate Rooney told CNBC in September that the company had nearly $1 billion to spend on bailouts if the right opportunities emerged to keep key players afloat.
“It wouldn’t be good for anyone in the long run if we had real pain, if we had real blowouts, and that’s not fair to customers and it wouldn’t be good for regulation. It wouldn’t be good for anything,” Bankman Fried said. “From a long-term perspective, that’s what was important to the ecosystem, it’s what was important to customers and what was important for people to be able to operate in the ecosystem without the fear that some unknown unknown was going to blow them up.”
It’s as if Bankman Fried was describing his own destiny.
FTX’s lightning-fast slump began last weekend after Binance CEO Changpeng Zhao tweeted that his company was selling its latest FTT token, FTX’s native currency. This followed an article on CoinDesk, noting that Alameda Research, Bankman-Fried’s hedge fund, is holding a huge amount of FTT on its balance sheet.
Zhao’s public announcement not only caused the price of FTT to drop, but also led to FTX customers reaching the exits. Bankman-Fried said in a tweet Thursday that FTX clients claimed about $5 billion in withdrawals on Sunday, which he described as “by far the largest.” Lacking the necessary reserves to cover the default banking operation, FTX turned to Zhao for help.
How are you
Binance announced a non-binding agreement to acquire FTX on Tuesday, in a deal that would have been so disastrous for FTX that stock investors had expected it to be wiped out. But Binance reversed course a day later, saying the FTX issues were “beyond our control or our ability to help.”
Bankman-Fried rushed out with billions of dollars, but on Friday, the company filed for Chapter 11 bankruptcy in the US. In the filing, FTX indicated it had assets in the $10 billion to $50 billion range and liabilities in the same range.
Venture company Sequoia Capital, which first backed FTX in 2021 at a valuation of $18 billion, said it is dropping its $213.5 million investment in FTX “to zero.” Cryptocurrency investment firm Multicoin Capital told limited partners on Tuesday that while it was able to recover about a quarter of its assets from FTX, the money stranded there represented 15.6% of the fund’s assets, and there is no guarantee that it will. You will get all of them. recover.
In addition, Multicoin said it took a hit because its biggest hub was in solana, which was declining in value because it was “generally considered to be within the SBF’s sphere of influence.” The company said it is sticking to its thesis and is looking for assets that can “outperform the demo market across market cycles”.
“We are not short term or momentum traders, nor do we operate on short time horizons,” said Multicoin. “Although this situation is painful, we will remain focused on our strategy.”
It won’t be easy.
Ryan Gilbert, founder of fintech startup Launchpad Capital, said the crypto world is facing a crisis of confidence after the collapse of FTX. While it has already been a tumultuous year for crypto, Gilbert said that Bankman Friedman was a trusted leader and was comfortable representing the industry on Capitol Hill.
In a market without a central bank, insurance company, or any institutional protection, trust is most important.
“It’s a question, can trust ever exist in this industry at this point in the game?” Gilbert said in an interview Thursday. “To a large extent the concept of trust is as bankrupt as some of these companies.”
Watch: Cryptocurrency exchanges are scrambling