November 15, 2022
The world is now grappling with the FTX cryptocurrency exchange collapse and it is unnerving for people that bought into this industry, hook, line and sinker.
The now former CEO of the company, Sam Bankman-Friend, is hiding in The Bahamas for the time being as investigators from the US and The Bahamas try to piece together his Chapter 11 filing in the US and the appointment of liquidators in The Bahamas.
A lot of allegation swirling about where FTX’s money went. But it has been said that the company sent $10bn to its sister company, Alameda. Now investigators want to find that $10bn. How did the company come to cash itself out without drawing the ire of regulators in the first place, is not yet determined.
But what we do understand is that the company’s cryptocurrency portfolio was severely exposed. Steve Mnuchin, former Treasury Secretary under Donald Trump said that he attempted to invest in FTX two times and the first time he balked, but came back to the table and the second time the exchange was five times bigger than it was the first time. Indicating that FTX was using valuation methods that would signify that it was using “asset classes” rather than on the strength of the blockchain technology that brought it to existence.
In fact, this is exactly what happened with FTX- it used valuation methods that investment banks used and underpinned their exchange to assets that then lost value in the market and when they lost value, FTX lost value. So when it came time for the bailout from Binance, their competitor a few weeks ago, when Binance looked at their books, they too turned away from bailing out the exchange due to the toxicity of FTX’s balance sheet.
What happened after that was a “run” on FTX as investors sensed the company was in distress due to Binance balking at bailing it out and they began pulling money out of the company, causing the failure to come full circle to what we have today. A collapsed cryptocurrency exchange.
Thankfully, this failure has more to do about the failure of these investment bank investment strategies, more than it is about the fundamentals of blockchain. It seems as if Bankman-Fried got too greedy and wanted more than what his company was actually worth.
Sadly, unless there is a government bailout, investors will most likely never be made whole and get their money back.
Such is life!