The cryptocurrency market may never be the same after the FTX collapse, which seems to be triggering developments on multiple levels. Already analysts are comparing the FTX “fiasco” to Enron or other… “painful” stories, although it is certainly too early to draw conclusions about the magnitude of the “disaster”.
The avalanche of events seems to have no end, as after the company filed for bankruptcy on Friday, the resignation of CEO – and one-time crypto “wunderkind” Sam Bankman-Fried – was followed by a suspicious hack that “drained” hundreds of millions of dollars worth of assets from customer accounts.
And the dominoes continue: on Friday, California authorities announced that they suspended the operation of crypto startup BlockFi after it halted customer withdrawals amid the “plunge in digital assets caused by the FTX crash.”
Moreover, the hack on FTX, combined with its bankruptcy, further removes the hopes that users of the exchange had to recover their funds that have been “frozen” on the platform since Tuesday.
As if all of this wasn’t enough, FTX on Sunday mysteriously released around $400 million of its native token, FTT, which was also at the heart of the scandal, sparking even more fears of illegal activity. This is reinforced by the news that the face of the day, Sam Bankman-Fried, may well be withdrawing from FTX’s “frozen” funds via a “back door” located in the Bahamas, as reported by CNBC.
Now, it is unknown to what extent the effects of the collapse may “spread” as the company’s renewed bankruptcy filing on Tuesday cites over 1 million creditors as being in immediate danger of being “cannoned”…
The “bubble”
The criticism that is now openly voiced is that the official state authorities did not act in time to prevent the “bursting of the bubble”.
Diabolical stars like Sam Bankman-Fried made sure in the past 2-3 years to enrich themselves by climbing on the “wave” of speculation that lifted cryptocurrencies, boosted by the huge volumes of liquidity of the pandemic-era support programs.
After the 2008 financial crisis, the Fed began quantitative easing, sending interest rates to historic lows by buying massive amounts of assets, causing a boom in equity markets and beyond.
After the March 2020 crisis, when markets went into shock at the start of the pandemic, QE “touched” unthinkable heights as the Fed’s portfolio rose to $9 trillion.
FTX was among the beneficiaries of this “ocean” of liquidity, as by the end of 2021 the value of bitcoin, the main cryptocurrency, had reached almost $70,000 from the massive influx of investors into the market.
Alongside the financial juggernaut, Bankman-Fried was gaining connections with the highest echelons of the Democratic Party as a major donor, and he was doing TV interviews with former President Bill Clinton and former British Labour Prime Minister Tony Blair.
At the same time, he was far from “humble” and secretive about how the market he and his company represented worked.
As recently as last April, in an interview with Bloomberg, Sam Bankman-Fried acknowledged that his company was in fact a Ponzi scheme, i.e. a system based on ‘air bail-outs’ from which money comes out as long as more money keeps flowing into it, giving perhaps the most perfect description of the reasons for its future bankruptcy.
Talking about his business, he said, “you start with a company that builds a box” and then “you dress it up to look like a life-changing, you know, world-changing protocol that will replace all the big banks in 38 days or whatever.”
After hearing Bankman-Fried’s admission, the Bloomberg reporter responded that what he was describing was a Ponzi scheme, with the investor responding that this is a “pretty reasonable answer” that is “depressingly accurate.”
But instead of ringing “bells” about Bankman-Fried’s words about the crypto market and himself personally, no competent authority even attempted to ask what he meant.
Instead, the SEC has never engaged with him, while he has enjoyed undivided media attention: for example, as recently as August, Bankman-Fried was on the cover of Fortune magazine where he was hailed as the potential next Warren Buffet, Berkshire Hathaway’s multi-billionaire and the sixth richest man in the world.
Two months ago, the venture capital firm Sequoia Capital, in a 14,000-word article about Bankman-Fried, said he has “legendary status” with “a vision for the future of money itself.”
The collapse
As analysts point out, the vast majority of the assets held by FTX, and similar exchanges and companies, were created out of thin air, consisting of assets that were bought and sold, generating huge billions of dollars in profits, without producing any real value.
So, in addition to the personal who and what Bankman-Fried and FTX did, with the broader change in the financial landscape and the withdrawal of “loose” monetary policy, the last layer of “thin air” on which the massive cryptocurrency market of recent years was built was removed, leading to its sinking.
Significantly, bitcoin, from around $70,000 in 2021, is now trading below $17,000, pushing thousands of investors who believed in it to financial ruin.
The landscape for crypto is darkening
The political pressure in the US from indignant FTX investors seeking their money is already starting to become visible, giving “justice” to skeptics who have been calling for tighter control over the cryptocurrency market, and using the bankruptcy (or fraud, according to others) of FTX as an example of their vindication.
“We are in contact and coordinating with law enforcement and relevant regulators,” the company’s new CEO and head of restructuring, John Ray III, said in a statement, according to Politico.
But the chaos caused by the FTX bankruptcy has already undermined all the “work” that has been going on in the US over the past year to further institutionalize the crypto market.
The immediate result was the withdrawal of the bipartisan bill to bring cryptocurrency trading under the control of the Commodity Futures Trading Commission, under the weight of stiff opposition from consumer groups and lobbyists of the crypto market itself, who described the measure as an example of Bankman-Fried’s influence in Washington, as the investor was also one of his biggest superpowers.
