Someday, there will be a Netflix documentary about Sam Bankman-Fried. SBF — as he’s known in crypto circles — was worth more than $14 billion about 10 days ago. Today, the founder and former CEO of popular crypto exchange FTX is bankrupt. SBF’s stunning fall from grace is the result of a scandal that’s one part Theranos, one part Enron and one part Lehman Brothers. And the crypto markets are tumbling thanks to his malfeasance.
FTX used to be a popular crypto exchange. Crypto investors bought and sold crypto on the exchange. And SBF was a hero in the crypto community. But what people didn’t know is that SBF was secretly moving money and assets from FTX to Alameda Research, his crypto trading company.
Alameda Research was using the assets from FTX to either cover bad investments or make extremely risky investments.
When word came out that FTX might have liquidity issues, customers rushed to withdraw their funds. But FTX didn’t have the cash to give its customers their money back because SBF had lost it making bad bets at Alameda.
SBF tried to convince someone (anyone) to buy FTX and return all the money owed to FTX customers. And for a hot minute, SBF’s chief crypto rival — Binance founder and CEO Changpeng Zhao — emerged as a potential buyer. But CZ (as Zhao is known in the crypto world) pulled out of the deal after he began the due diligence process.
When no buyer emerged, FTX filed for bankruptcy. And as details of FTX’s and Alameda’s books emerge, it’s becoming clear that billions of dollars are missing and FTX customers might never be made whole.
(Note: This is the abbreviated version of the story. If you’re interested in learning some of the juicier details and more about how to approach investing in this environment, make sure to subscribe to First Stage Investor. I’ll write more extensively about all of this on Monday.)
As a result of the FTX-Alameda mess, the crypto markets are falling hard. Bitcoin had been trading around $20,000 for almost a month. Now it’s trading below $16,600. Yikes.
I fully expect the crypto markets to continue their downward spiral. Every new FTX revelation will likely spark another round of selling. But I also believe the crypto ecosystem is quite resilient and will recover from this mess. The FTX saga says more about the failures of centralization, venture capitalists and a growing ecosystem than it does about crypto. (Reminder: I’ll discuss the failures of the system at length on Monday, so make sure you sign up for First Stage Investor.)
I don’t know how quickly the crypto markets will bounce back. But once we understand the depth and breadth of the FTX collapse, there will likely be some good buying opportunities.
Crypto isn’t going away. But as always, it is changing. And we’ll change right along with it.