| Tuesday was the craziest day in crypto’s history. Think we’re exaggerating? Take it from crypto OG and Messari founder Ryan Selkis. "Nine years in crypto. Today is the craziest day since I bought my first Bitcoin in 2013. Crazier than Mt Gox. Much crazier than 3AC/ LUNA. Just shocking." In the span of hours, powerhouse crypto exchange FTX went from being the exchange behemoth that competitors were nervous about, to “oh crap, what’s going on here?”, to pausing withdrawals, to potentially being acquired by rival exchange Binance, to going straight up insolvent.
Jaw on the floor.
Let’s try to make some sense of what went down.
A Concerning Balance Sheet
The beginning of the end was a November 2nd report from CoinDesk.
In it, CoinDesk described how much of Alameda Research’s balance sheet is held in FTX’s FTT token. Considering that Alameda is FTX CEO Sam Bankman-Fried’s trading firm, this raised a whole bunch of red flags.
A trading firm whose assets are primarily tokens created by its sister exchange? Doesn’t exactly inspire confidence.
Consider Binance CEO Changpeng Zhao (CZ) among the skeptical parties.
Binance Death Blow
Binance, an early investor in FTX, held $2 billion in FTT tokens. CZ, supposedly concerned about the CoinDesk report and pissed off from SBF flexing his DC connections, tweets that Binance will be liquidating their FTT.
Naturally, this causes fear among FTT holders, as having $2 billion worth of a token being sold at once would not be great for its price. So, investors respond by attempting to sell before Binance does. In other words, a good old-fashioned bank run.
For Alameda, a bank run on FTT is the worst possible outcome, as remember, CoinDesk reported that a huge amount of their balance sheet was in FTT. Suddenly, the majority of their balance sheet was cratering downward.
Investors, putting two and two together, quickly realized that a dead Alameda would most likely mean a dead FTX. Thus, a mad scramble to get off FTX began. It wasn’t long before FTX had a full-blown liquidity crisis and had to pause withdrawals.
This situation is now looking awfully similar to Celsius.
After a few hours of Crypto Twitter panic, SBF announced that FTX had a non-binding agreement to be acquired by Binance. But as we found out literally minutes ago, the deal is officially off.
According to Binance: As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com. Ouch...
While details are, of course, still unraveling... Not even Binance – the world's largest exchange – wants to touch this bag of hot, seemingly fraudulent, and debt-ridden, garbage we now call FTX.
The Consequences
This story is constantly evolving and seems to have a never-ending amount of layers, but for now, let’s recap some of the consequences of FTX’s demise for crypto. - SBF is no longer a billionaire
- FTT is down ~90%
- FTX-backed coin SOL is down 60%
- Most major coins, including BTC & ETH, down ~20%
- Robinhood (HOOD), which SBF owned 7.6% of is down more than 30% since Monday
- The $2 billion FTX had raised from VCs (including Ontario Teacher’s Pension) has likely gone up in smoke
We also don’t know how far SBF/FTX/Alameda’s tentacles go…
They’ve invested billions of dollars into other crypto/fintech companies, donated millions to charitable causes (and politicians), and bailed out multiple multi-billion dollar companies. Speaking of bail-outs, in June, CoinSnacks commented: "FTX/SBF/Alameda are stepping in to "save the day" with some individuals cheering about how private companies bailing out private companies "is how capitalism is supposed to work." And yes, we agree that the private option is significantly better than the government using taxpayers dollars to bail out companies.
But we still can't help but point out that the point of crypto is decentralization. SBF being the "lender of last resort" for multiple companies may be good for them, but we need to ask, how is it good for the users?" The Future
But, okay… what does this actually mean for you and your money, you are probably asking yourself?
To be blunt, in the short-term, things are going to be rough. Crypto prices will be volatile, there will be a lot of fear in the markets, and we expect politicians to get even sharper toward crypto.
But in the long-run, there will be winners due to this debacle. So let’s make some predictions. - Western, regulated exchanges will gain market share.
Investor confidence in offshore, unregulated, exchanges with murky ties have lost a lot of confidence from investors with this debacle. We expect exchanges like Coinbase (COIN), Kraken, and Blockchain, to be major winners in the coming years.
- Investors will flock to “blue-chip” cryptoassets.
Assets such as Bitcoin and Ethereum will once again be seen as relatively safe assets as investors lose confidence in many, riskier tokens.
- Regulators will come out swinging
Regulators are sure to have a “told you so” moment once elections settle down. As in, they’re going to have a lot more gunpowder as crypto bills begin to circulate throughout congress again. As always, let’s just hope they don’t go overboard by stifling domestic innovation going forward.
Taking a Step Back
Since we began writing CoinSnacks in 2017, we have time and time again pounded the table that investors should focus on putting their money in things they can understand (like Bitcoin, Ethereum, and backdoor plays).
We suggested that investors only risk what they are okay with losing in offshore exchanges and tokens that they don’t fundamentally have a grasp with. It’s worth highlighting what we send to every investor that signs up for CoinSnacks: "You see, there's a reason we tend to stick to the basics (i.e. bitcoin (BTC), Ethereum (ETH), crypto stocks, institutional adoption, the macroeconomic implications of crypto, etc.).
That’s because we can actually make sense of it.
The rabbit holes into DeFi, algorithmic stablecoins, NFTs, the metaverse, and the thousands of “altcoins” the world of crypto investing offers come with a double-edged sword.
Yes, many of these things are groundbreaking, innovative, exciting, and do serve a purpose to some extent in the new digital age of finance and banking. But many folks fail to realize just how speculative these “trendy” experiments are.
Despite all of its promise, the deep corners of the crypto market can be dangerous for investors. We’ve witnessed copied-over whitepapers, endless shilling, deceptive marketing, exchanges listing everything under the sun just to drive more fees... the list goes on and on. But most importantly, we’ve seen the retail crowd rush into these assets without any foundational understanding of how these blockchain protocols actually operate.
As the saying goes, the important thing is to know what you know and know what you don't know. |
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Is this 'America's Nightmare Winter'? |
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| This could be much bigger than car, food, computer chip shortages, and most certainly the collapse of FTX. Bloomberg says, it's "a situation that could worsen heading into winter," causing serious problems in nearly every sector.
Will it affect you and your money?
Find out right here. |
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Coinbase Posts Mixed Q3 Earnings |
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| The past few weeks have been Q3 earnings report season for many of the major tech companies, and last Thursday was Coinbase's (COIN) turn.
Let's go over the good, the bad, and the hopeful for Coinbase's third-quarter earnings report.
The Good
Although crypto is in a brutal bear market, there are areas of Coinbase's business that are doing quite well.
Chief among these are their subscription and service programs. Revenue in these programs grew 43% (to $211 million) from Q2, which would have been 82% had crypto prices held constant.
This is a dramatic increase, due to rising interest rates. With rates not looking to be slowing down any time soon we expect this number to continue to grow.
Coinbase also did an excellent job cutting costs in Q3, as total operating expenses declined 38% from Q2. This allowed Coinbase to end the quarter with $5.6 billion in cash and $483 million in crypto, a more than sturdy rainy-day fund for the remainder of this bear market.
The Bad
Make no mistake about it; the bear market is definitely taking its toll on Coinbase.
This is primarily seen in people trading less, resulting in lower transaction revenues (down 44%) and net revenues (down 28%), both of which missed analysts' expectations.
The result was a total Q3 loss of $545 million.
For Coinbase to become profitable, the macro environment will have to flip bullish again.
The Hopeful
Overall, not the worst earnings report for Coinbase.
The company is still in a strong spot cash-wise, is printing money with its service and subscription business, has onboarded roughly 25% of the 100 largest hedge funds, and has formed a close relationship with USDC, the dominant U.S. stablecoin.
Should the bear market end and people start trading actively again, it is almost certain that Coinbase will become profitable again very quickly. Not to mention, they’re onboarding waves of new users/traders as we speak – all thanks to FTX virtually disappearing overnight. |
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Feds Recover $3.4 billion in missing Bitcoin |
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| Last November, the U.S. Department of Justice made out with the haul of a lifetime.
The Feds announced on Monday they had recovered and seized 50,676 bitcoin from the darknet marketplace Silk Road in an unannounced November raid, which at the time was worth a massive $3.36 billion.
The seizure ends a decade-long mystery over the fate of the stolen Silk Road bitcoin. For those who weren’t busy scrolling the darkweb back in 2012, Silk Road was a marketplace where everything known to man was bought and sold using bitcoin.
Silk Road is now best known for breaking many laws and its founder Ross Ulbricht being sent to prison, but it is also known for having 50,000 bitcoin stolen out from under it.
Now, those bitcoins have been found in the Georgia home of James Zhong, who is now on the hook for wire fraud and 20 years in prison.
The scheme behind the theft turned out to be quite complicated. Basically, Zhong created nine phony Silk Road accounts, funded them with some bitcoin, and then quickly triggered over 140 transactions in a row. This made Silk Road’s withdrawal-processing system bug out and deposit 50,000 bitcoin into Zhong’s accounts.
Overall, a very good job by the Feds to track down this money. Hopefully they sold before bitcoin crashed. |
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