- FTX, a $32 billion cryptocurrency exchange, filed for Chapter 11 bankruptcy on November 11.
- Lack of corporate funding and misuse of consumer funds have left a mark on the industry.
- An insider asked 5 venture capitalists what they thought about the collapse of Sam Bankman Fred's cryptocurrency empire.
Cryptocurrencies have had their fair share of success this year, with the demise of algorithmic stablecoin TerraUSD, the collapse of the now defunct and overused hedge fund Three Arrows Capital.
The Federal Reserve's efforts to fight inflation are not helping the position, making investors wary of riskier bets. The cryptocurrency market's value is down 72 percent from its all-time high last November, Misri Data reported Monday.
However, this month has brought a series of new releases to the industry. The crypto empire started by the beloved industry project Sam Bankman-Fried has collapsed.
FTX, a cryptocurrency exchange valued at $32 billion in February, filed for Chapter 11 bankruptcy on November 11. However, in an emergency court filing on Thursday, FTX Bankuman-Fried transferred its assets to the Bahamas government after the company filed for bankruptcy.
How did we get here? Well, Alameda and FTX have an unusually close relationship for two different entities.
The FTX token, nicknamed "FTT", will be marketed for the benefit of shareholders seeking low transaction fees on the platform. But the token accounted for a large portion of Alameda's balance sheet, Coindesk first reported on November 2nd, eventually leading to a "bank run" for FTX. (Investors get scared and withdraw a lot of money at once).
These FTT tokens are being used to fund Alameda, and the company is misusing and trading customer deposits, according to CNBC. The second largest cryptocurrency exchange has hit the industry hard as users are unable to access their funds.
"I messed up and should have done better," Banman-Fried tweeted a day before stepping down as CEO of the company he founded.
The virtual founder resigned and was replaced by CEO John Ray III, who oversaw Enron's bankruptcy process. "Never in my career have I seen such a complete breakdown of company control and lack of reliable financial information as occurred here," Ray said in court filings.
In the last election cycle, Banman-Fried was the second-largest donor to the Democratic Party, spending about $37 million on various candidates, according to OpenSecrets data. He held several meetings with senior organizers and attended congressional retreats.
"The news of FTX's failure is known to everyone in the market, as Sam is very popular even among institutional investors and regulators," said Vadim Krikotin, founder of Cryptomeria Capital Company.
Regulatory suppression and bullfighting for DeFi
An insider asked five venture capitalists what their biggest success was after the crash. The consensus is that regulatory theft is imminent and DeFi, or decentralized finance, can stop it.
Senior government officials quickly spoke out against FTX after the disaster, calling for more regulatory oversight of the emerging space.
"It is clear that there are serious consequences when cryptocurrency entities operate without strong federal oversight and customer protection," the representative said. House Financial Services Committee Chair Maxine Waters said in a statement.
According to a report in the Wall Street Journal, the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are investigating FTX for civil and criminal securities law violations. In an interview with CNBC on November 10, SEC Chairman Gary Gensler said, "Investors need better protection in this area."
"Regulators will use the opportunity to strengthen their grip on the industry, just as some have ironically teamed up with Sam Bankman-Fried to crush DeFi," said Mark Weinstein, a partner at cryptocurrency firm Mechanism Capital.
Many argue that moments like these only prove a bullish case for DeFi, with the failure of large centralized companies like FTX Group. Last year, conglomerates such as lender Celsius and digital asset broker Voyager Digital filed for bankruptcy and one for restructuring. FTX is the next shoe.
"First, the cryptocurrency market is contracting, paving the way for another recovery. Second, a large percentage of poorly managed companies are disappearing," according to blockchain general counsel Roland Sun, according to venture capital firm Fenbushi Capital.
DeFi continues to be a bright spot in the cryptocurrency market as the FTX crisis continues to unfold.
Using decentralized exchanges like Uniswap and SushiSwap can prevent FTX risks because the protocol is on-chain, meaning users can see their funds being used. Defi lending platforms like Aave operate on supply and demand, so liquidity becomes more difficult. For example, if Aave has problems, since it is a decentralized DAO or an independent organization, its founder cannot decide the future of the project by himself. Instead, token holders will vote on Aave's roadmap, reducing the risk of someone diverting funds from the project.
According to Yida Gao, general partner of Shima Capital Co., the situation “showed more interest than non-custodial DeFi. If a company goes bankrupt, this also prevents bankruptcy if users keep their money in a cold wallet instead of a centralized platform.
"Furthermore, DeFi continues to perform well as we see a significant amount of trading moving to decentralized exchanges like dYdX," Weinstein said. "Finally, more users are learning the importance of cryptocurrency self-storage and new user experience (UX) improvement activities will emerge around this."
How to prevent FTX? Early venture capitalists
Aggressive investors are advised to exercise extreme caution in the next market cycle. Weinstein talks about avoiding so-called hot spin. While venture capital giants like Softbank posted a $100 million loss on FTX, Sequoia Capital lost $210 million on its investment in the company.
"Proper risk management is also very important," Gao added. The risk of FTX failure can be reduced by a "hands-on approach" on the part of the project investor.
"Frequent checks with the parent company can help avoid some mistakes in transactions," Gao said. "When evaluating an investment, always focus on the long-term view. Transparency is needed both internally and externally."
But aggressive investors say the carnage is far from over . According to The Sun, the market value of cryptocurrencies will decrease and many institutions will disappear.
"I think this will put us back a year. The disruptions and impacts from the FTX crash will continue for at least a few months, until February-March 2023," Cricotin said. "We have to be very careful and very selective when investing. With new and old projects and tokens. There are many pitfalls that we don't know about. And not all market participants are willing to admit that they are currently facing public problems."
But the industry could get even stronger once cryptocurrencies finally take off.
"As the news continues, it's becoming clear how bad the FTX/Alameda representative is. It's like chemotherapy, it kills cancer, and if the industry doesn't die because of it, we'll be stronger," he said. . Weinstein added that the company's valuation will soon drop.
Mason Borda, founder and CEO of the crypto platform, said: "It's good that the market is shaking off players with weak foundations. This can continue for several cycles because the market knows which products will and will not work in the long term." TokenSoft. , he says.