Crash crash course

Welcome to another turbulent day in crypto. Like the last three days, except this time it’s Friday. You know what’s ironic? The fact that Tuesday’s edition covering the SBF vs. CZ Twitter drama was published 3 minutes before all hell broke loose. But hindsight is 2020…so let’s focus on what happened, why it happened, and what comes next.

Today: Unprecedented times call for unprecedented newsletters. So today we’re covering FTX top to bottom—but in three very different ways. Grab your popcorn.

—Angelina & Vincent

The FTX Wind Down

It all started with a scoop from CoinDesk on Monday: The assets of one of the largest proprietary trading firms in crypto were made up of the native token of its sister company, which was one of the largest exchanges in crypto.

Once news broke that Alameda Research’s balance sheet was chock full of FTX’s native FTT tokens, investors started to worry about the solvency of both Alameda and FTX. Among the first to really sound the alarm was the crypto exchange Binance, which announced that it would start liquidating FTT tokens—soon after, other investors followed suit.

Here’s what happened on Monday: Shortly after Alameda all but confirmed that the balance sheet allegations were at least partially true, traders started to short FTT, and the token fell by 14% in a day. FTX CEO Sam Bankman-Fried denied the rampant insolvency rumors.

By Tuesday, enough happened (starting at 11:03 am ET) to warrant a bulleted list →

• FTT tanked even further and by the end of the day had lost 80% of its value in 24 hours. The BitDAO Community asked FTX for proof of funds.

• Binance signed a letter of intent to purchase FTX so long as it felt confident in the deal after a period of due diligence. Bitcoin fell below $19,000 despite the Binance announcement, which would theoretically buttress a potentially failing FTX (and markets along with it).

• FTX halted customer withdrawals, and SBF joined the ranks of the former billionaires after most of his wealth was wiped out.

On Wednesday: CoinDesk reported that Binance was leaning towards not going through with the deal (Bitcoin price check at that point: below $16,000, a two-year low). It was becoming clear that this story was less about a megadeal and more about a megacompany failing in spectacular style. The evidence:

• Most of FTX’s legal and compliance team quit.

• Bloomberg dropped a bombshell report detailing how the SEC had been investigating FTX’s handling of customer funds for months.

• The websites for Alameda Research and FTX Ventures went dark.

Soon, frantic FTX customers started selling the remaining balances in their accounts in over-the-counter trades for pennies. Similarly, concerns over Alameda liquidating its Solana tokens tanked the NFT markets.

Then everything fell through: Binance walked away from the FTX deal, SBF warned investors that the exchange was headed for bankruptcy, and the SEC and Department of Justice opened up a new investigation into FTX over its implosion.

By Thursday, it was clear that this would be a historic (in the bad way) week for crypto. But what shape does the industry take after a fallout of this magnitude? Hard to predict. What we do know:

Early Thursday morning, FTX suspended new customer sign ups. You’d think this is when the dust would start to settle, but this is crypto:

• SBF said Alameda would wind down…

• But Reuters reported that FTX is planning to conduct a fundraise next week. FYI, FTX.US is a separate U.S. sister company to FTX that SBF said was “fine” at first—but later in the day FTX.US sent out a warning to customers that trading would be halted on the platform.

So what comes next? FTX reopened withdrawals again, according to on-chain data provider Nansen, but CoinDesk reported that balances on FTX had been drawn down by 87% in the past five days.

On Friday, FTX began chapter 11 bankruptcy proceedings, and SBF resigned as its CEO. John Ray III, who oversaw Enron’s wind down, will take over as FTX CEO.

What to look out for: This is one of the largest falls from grace in the history of crypto. SBF's was a face D.C. lawmakers knew well, and FTX was courting institutional and retail money for years. While the aftermath has yet to be fully realized, one thing is for certain—the crypto exchange business model as it exists now—shrouded in secrecy and with little oversight—will not continue.

Oh and P.S.? SBF’s crypto empire was allegedly run by 10 people who all used to date each other.

—Vincent

Contagion Risk

While we’re still waiting for the final diagnosis, the SBF virus appears to be worse than the stomach flu. Our medical advice as non-medical professionals? Reduce exposure. To help you avoid infection, here’s a breakdown of the FTX fallout.

FTX’s collapse is bad news for…

• Solana. SOL is one of the biggest losers of the whole situation, down nearly 50% in a week. SOL is Alameda’s second-largest holding, and investors fear that SBF’s investment arm could dump its SOL onto the market to raise fresh liquidity. Protocols built on Solana are taking a beating, too.

• NFTs. The value of NFTs built on Solana is tanking and Solana-based NFT marketplaces are feeling the pain of spiraling trading volumes.

• U.S. Democrats. Back when he had billions burning a hole in his pocket, SBF was a political mega-donor. He was one of the single largest donors to President Joe Biden’s campaign and promised to spend $1 billion in the next U.S. presidential election. With SBF’s downfall, the Democratic party is losing a stellar source of individual funding.

• Institutional investors. From pension funds to VCs, institutional investors bet big on FTX, assuming it was one of the less risky entities in all of crypto. Now, Silicon Valley’s biggest investors are marking their nine-figure investments down to zero. Meanwhile, the crypto-focused financial firm Galaxy Digital revealed its $76.8 million exposure to FTX (this is a drop in the ocean of Galaxy’s $1.5 billion in liquidity).

But: Some of crypto’s biggest names appear to be immune to the fallout. Stablecoin heavyweights Circle (in which FTX was an investor) and Tether both declared that their exposure to FTX and Alameda is practically null. Coinbase, Wintermute, and Robinhood followed suit.

Big picture: SBF had his fingers (and token) in a lot of pies—making FTX’s collapse especially messy. While it’s still too early to grasp the entire scope of the contagion risk, one thing’s clear—the effects of the FTX fallout on the entire crypto ecosystem will be vast.

—Angelina

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Changing Crypto Forever…in a Good Way?

We’re not in the business of mindset coaching, but if we were? We’d say crypto is in desperate need of some positivity right now. So, here’s the silver lining of the FTX fiasco:

In the old Bitcoin ethos of “don’t trust, verify,” 10 of the biggest centralized crypto exchanges have pledged to implement a Proof-of-Reserves (PoR) audit system following an appeal from CZ on Twitter.

The details:

• Binance, Gate.io, KuCoin, Crypto.com, Poloniex, Bitget, Huobi, OKX, Deribit, and Bybit all issued separate statements declaring that they would publicly publish their fund reserves.

• PoR audits are typically conducted by an independent third party with the goal of proving that a custodian is solvent—giving investors the peace of mind that their funds are safe.

Looking ahead: As Steve Jobs famously said, “fail forward.” PoR isn’t just nice to have. It’s a crucial step towards establishing a baseline level of trust in DeFi.

The FTX disaster could be the catalyst that finally establishes PoR as the new industry standard, forcing centralized exchanges to become fully transparent with how they handle customer funds.

—Angelina

In other news:

What even is "other news" this week?

• Coinbase cut an additional 60 staff as it tightens its belt in the bear market.

• Galaxy Digital doesn’t expect to be able to retrieve the $77 million it held on FTX.

• El Salvador’s President Nayib Bukele denied holding any of the country’s bitcoin on FTX.

• Grayscale’s bitcoin fund hit a record discount of 40%.

And that’s what you need on your radar today in crypto. Who else is experiencing pangs of anxiety every time they refresh their Twitter feed? Fingers crossed that the weekend provides some relief…see you back here on Sunday.