While the cryptocurrency market continues to falter, billionaire Sam Bankman-Fried’s cryptocurrency exchange FTX is “looking” again.
A leaked presentation to investors focused on the company’s impressive growth, disclosing that the exchange has about $2 billion in cash. But why was FTX meeting with investors trying to raise capital when the business is profitable and its coffers are flush with cash?
According to people with knowledge of its operations, FTX is likely preparing to make acquisitions – perhaps even larger than the dozens of investments it has made in the past 18 months.
One of Bankman-Fried’s priorities is to grow FTX in the United States by attracting more retail customers. FTX.US contributed less than 5% to FTX’s $1 billion in 2021 revenue, according to leaked financials.
“We are well behind some other companies, such as Coinbase, Robinhood and Binance, in terms of our brand name recognition, number of users and consumer utilization of our services,” Bankman-Fried tells Forbes.
However, over the past year you may have noticed that Bankman-Fried and FTX’s public standing has been enhanced – and more so than the other “players” in the crypto market.
He was on the cover of Forbes a year ago, and recently Fortune magazine likened him to Warren Buffett.
Last February, FTX advertised at the Super Bowl, while the Miami Heat’s basketball court is now called FTX Arena.
If the cryptocurrency market suffers from something, it’s credibility. Bankman-Fried’s public maneuvers have cleverly helped establish market confidence in him. But given that FTX has just 212,000 monthly active customers, catching up with the blue chip of the US cryptocurrency market, Coinbase, which has 9 million active users, may prove to be time-consuming.
In financial services, it has always been difficult to convince consumers to switch their bank and brokerage accounts. Inertia is an advantage that incumbent financial institutions such as JPMorgan Chase, Wells Fargo and Merrill Lynch have always relied on.
How could FTX make the “leap” into the group of the most trusted brokerage firms? One option would be to acquire Robinhood – and together: 14 million trading accounts. Robinhood’s market value has plummeted 80% in the last year, to $8 billion.
In May, Bankman-Fried revealed that he had a 7.6% stake in Robinhood through a company he controls called Emergent Fidelity Technologies, and in June rumors circulated that he was trying to buy it. “FTX is not in negotiations to acquire Robinhood,” a company spokesman commented, adding that Bankman-Fried bought the stake “because the shares were falling” and because he considers Robinhood an “undervalued asset.”
READ ALSO: Who will buy Robinhood?
Any new takeover would rise to the top of Bankman-Fried’s business actions in recent months, which has moved aggressively by providing lines of credit to troubled cryptocurrency companies, and its deal with banking platform BlockFi includes an option to buy it.
A huge advantage for FTX to expand its US operations and wrest market share from Coinbase is not only its large amount of cash, but also its lean structure.
It employs around 350 employees compared to Coinbase’s roughly 5,000 employees, and its transaction fees average under 0.05%, when Coinbase charges 0.35% (and sometimes up to 3%). This means that even if FTX quadrupled its commission for retail customers, it would still pressure Coinbase to significantly reduce its fees.
In addition to retail customers, FTX is also interested in professional traders who use more sophisticated financial products, such as cryptocurrency derivatives that bet on the future price of a digital asset.
The majority of the daily trading volume in cryptocurrencies, which exceeds $100 billion globally, is in derivatives. In the US, however, there is almost no trading of cryptocurrency derivatives due to the regulatory framework.
If the regulations are changed and exchanges like FTX are allowed to sell derivatives to US investors (FTX has already applied to the US Commodity Futures Trading Commission for such a license), the volume of trading in cryptocurrency derivatives on US soil will skyrocket, Bankman-Fried notes. “I would not be surprised if the US share of cryptocurrency trading – globally – then climbs from 5% to 25%.”