The Rise and Fall Of FTX: The Aftermath.
Sam Bankman Fried’s many excesses and malpractices have resulted in the fall of the third biggest exchange in the world, and with such a big hole left in the market, the ripple effects have been felt throughout the entirety of the DeFi ecosystem.
The bankruptcy of the Ftx platform is the biggest crash in the crypto world since the industry’s inception, as customers’ and investors’ money evaporated. The company had come to be worth 32 billion dollars. Then the discovery of a hole of over 8 billion, aggravated by the multiple counts of mistrust directly coming from experts of the sector, like Binance CEO CZ.
And while the true tragedy lies in the many retail investors that have lost the majority o their assets, the grand majority of the losses came directly from institutional investors, like Blackrock the world’s largest asset manager, Softbank, a huge Japanese holding company, as well as venture capital funds such as Greylock or Sequoia, which had invested massive amounts of capital in the platform.
The financial consequences of the disaster are difficult to quantify but potentially equivalent to several tens of billions of dollars.
“This reinforces the idea that any kind of financial firm needs extensive regulation,” said James Malcolm, head of foreign exchange strategy and cryptocurrency research at UBS, glossing over the many points of contentions that were behind the fall of the crypto giant, spreading a bad light over the entirety of the crypto market.
The relation between FTX fall and the crypto market prolonged winter.
In 2022 the market value of cryptocurrencies collapsed from over $2.8 trillion to $766 billion. The end of almost fifteen years of extraordinary monetary expansion by the world’s major central banks was a decisive contributor to this sudden drop, alongside a plethora of other factors, like the tragedy that’s happening in Ukraine, the skirmishes on the Indian border, the political unrest in the middle east, and many other minor disasters that are currently affecting the mainstream market.
“The number of exchanges with stronger balance sheets able to bail out those with low capital and high leverage is shrinking within the crypto ecosystem,” said JPMorgan strategists, pointing out an obvious but often overlooked phenomenon that’s happening in the DeFi space.
The demise of Ftx has affected many institutions, and we aren’t aware of how far this ripple effect will spread, mainly due to the fact that It is difficult to know at this point who was directly exposed to the FTX fall.
Although there could be knock-on effects in this climate the ‘crypto winter’ becoming worse, or at least staying with us for a longer time, was something already expected by many veterans of the space, especially as fears over the broader economic environment continue to erode appetite for risky assets.
What we actually have to fear from FTX collapse at this point are the short-term effects that may actually become long-term improvements over the many fallacies that the crypto market has been shown to have in the last few months.
Multiple experts have brought their weight to bear on the matter, stating the need for a safer industry now that more people have been exposed to the DeFi ecosystem, and now that many institutional investors have dipped their toes in the crypto market.
“In the short term, this is going to be very bad indeed for the cryptocurrency industry,” says Jay Jog, co-founder of blockchain startup Sei Labs.
“But I don’t think it’s going to ‘end things’ completely and I hope it will strengthen interest in my business, which focuses on creating more transparent and decentralised cryptocurrency exchanges,” adds Jog, shining light on something that we at the Synapse Network have believed since the inception of our project: the need for more safeguards in regards to the investors that were previously totally missing in the space.
Is the Institutionalized market actually scared?
While Jay Jog focused on more nuanced long-term effects, Shan Jun Fok, co-founder of Moonvault Partners, a cryptocurrency investment firm opinions on the matter takes a look at what the whales may infer from this situation
‘I expect the collapse of Ftx will drive institutional investors away from the crypto space just as they were making their entry. Although some professionals will continue to work on interesting projects, it may take years to restore confidence in the industry’s promise’.
This statement has to be taken with a grain of salt, especially in lieu of the heavy movements that many institutional players have made to ensure that their crypto holdings would actually increase during this crisis, showing that while this is a huge blow to the market, the long term vision still is very bullish for what is essentially a budding new area of traditional finance.
And one of the most revered people in the space, Binance CEO Changpeng Zhao said that the 2008 financial crisis is “probably an accurate analogy” for what is happening in the DeFi ecosystem, pointing out the many parallels between the current state of the digital market and the previous iteration of 2008 recession.
“We are a few years behind,” he says. “The regulators are going to take a hard look at this industry and be much tougher, which is probably a good thing.”
And while many people won’t like to hear that their dream industry of financial freedom and opportunity for everyone is being regulated, the truth of the matter is that the institutionalized market is lightyears ahead of the DeFi space for safeguards and investor protections, and, by combining this solidity with the advantages that blockchain tech brings, we can implement some truly revolutionary changes both in the digital space and the mainstream market.
The FTX collapse makes the world suffer in ways very few people are talking about.
If Bitcoin threatens to blow up El Salvador’s economy, there is another state that is already grappling with the repercussions generated by the failure of a famous cryptocurrency platform. We speak of the Bahamas, whose economy has been damaged by the resounding collapse of the Ftx cryptocurrency exchange platform.
As the Wall Street Journal reports, the US company investments in the Caribbean Island states are calculated in the millions of dollars, with the Bahamas projected stakes in the project amounting to hundreds of millions. But Ftx failed, everything collapsed and hundreds of local workers suffered.
In the Bahamas, offshore finance has always been at the heart of the economy, in addition to tourism. These two sectors contribute 85 per cent of the national GDP. A tax haven like The Bahamas could hardly pass up the opportunity to turn the island into an incubator for the burgeoning cryptocurrency market.
That, at least, was the intention of the government led by Philip Davis. Because of first Hurricane Dorian in 2019 and then the pandemic in 2020, tourists had stayed away from the country.
So the government decided to ‘diversify’ by focusing on cryptocurrencies as an engine for economic recovery. In April 2022, Davis inaugurated the construction of a campus capable of housing one thousand employees. It was the new headquarters of Ftx and at the side of the Bahamian Prime Minister was him, Sam Bankman-Fried, the founder of the platform.
We all know the end of this story, but we have to keep in mind that behind this downfall are not only bad financial strategic choices: there is also greed. The company was spending more than a hundred thousand dollars a week on superfluous items such as catering and transport services for employees. Some of these were offered the ‘opportunity’ to invest in the cryptocurrency industry.
Immediately after the collapse, all the rich foreign employees of the company disappeared. And among the local workers — as the American newspaper explains — only local private guards remained to guard the now empty buildings, leading to what can clearly be seen as a tragedy for the many people even marginally related to the project.
Where do we stand now?
Ftx has one million creditors worldwide and billions of dollars in debt.
SBF’s net worth peaked at $26 billion in March 2022 but fell to $10.5 in October 2022. It then falls again — on 8 November 2022, during Ftx’s solvency crisis — to $991.5 million. A contraction of 94%.
According to the Bloomberg Billionaires Index, this is the largest drop in the index’s history. On 11 November 2022, the day Ftx’s bankruptcy was declared, the same index considered Bankman-Fried to have no material wealth. Currently, Ftx has more than one million creditors worldwide. It owes $3.1 billion to the 50 largest creditors.
The cryptocurrency sector is notorious for its ups and downs, but several newspapers — including the New York Times — have called the failure of Ftx the ‘Lehman Brothers moment’ of digital currencies, referring to the collapse of the investment bank at the origin of the 2008 economic crisis. An assessment corroborated by CZ’s statement, and, in fact, the fall of Ftx generated the loss of value of many cryptocurrencies (Bitcoin lost 22%) spreading the damage capillary to many retail and institutional investors.
Not least because, unlike deposits in a traditional bank account, those on cryptocurrency exchanges are not guaranteed by the state and it is not known whether Ftx has ever had sufficient resources to compensate its customers for their losses. Up to 1 million institutional and retail investors could be affected with the potential loss estimated at $30 billion.
And with this many users heavily affected by the fall, we see a similar picture for the projects that were related to the project on a B2B basis.
First Genesis, then Silvergate, now Huobi. In the crypto world, 2023 began as 2022 had ended: under the wave of Ftx, the crash of the first exchange generated a contagion effect that seems to be generating waves far away from the epicentre of the collapse.
The Silvergate Case
With FTX falling down, we see many related institutions risking the same, like Silvergate which lost 47% on the Nasdaq after the financial services and cryptocurrency company reported that its clients’ total deposits of digital assets fell from $11.9 billion to $3.8 billion in one quarter (Q2 to Q3).
The company blamed the flight of capital on “a crisis of confidence across the crypto ecosystem, which has led “many industry participants to move to a risk-off position on digital asset trading platforms”. Silvergate Capital also mentions the ‘numerous high-profile bankruptcies’ in recent months, alluding to the Ftx case, among others. In order to keep its balance sheet highly liquid, Silvergate sold $5.2 billion worth of debt securities, generating a loss of $718 million. Silvergate then announced the dismissal of 200 employees, about 40% of its workforce.
The Genesis axe
It’s the same story for Genesis, which in turn plans to cut 30% of its workforce in a second round of layoffs in less than six months, according to sources surveyed by the Wall Street Journal. Genesis, which brokers digital assets for financial institutions such as hedge funds and asset managers, announced in November that its platform would stop making new loans and prevent clients from withdrawing funds, citing market turmoil caused by the Ftx bankruptcy. According to the US financial newspaper, Genesis is considering filing for Chapter 11 bankruptcy.
The Huobi Downfall
In the last few weeks, the crisis has also hit the trading platform Huobi, the latest among the victims of the ecosystem. The Singapore-based company has announced that it will reduce its employees by 20%, maintaining a ‘very light team’ in the current bearish market environment. Fleeing deposits, bankruptcy risks and a market in turmoil are still the effects of the Ftx cyclone. However, that hides a much deeper problem, of misplaced trust in figures who until yesterday were considered real gurus and today have become big-time fraudsters.
Sam Bankman-Fried on Tuesday pleaded not guilty to eight counts including fraud and conspiracy to launder money. The 30-year-old is accused of looting Ftx customers’ deposits to support his hedge fund Alameda Research, buying real estate and donating millions of dollars to political causes. Another crypto entrepreneur, Alex Mashinsky, founder and former CEO of Celsius Network, also faced a legal battle in recent hours. A new lawsuit was filed yesterday by the New York Attorney General, according to which Mashinsky defrauded investors by hiding the failing health of his now-bankrupt cryptocurrency lending platform. As recalled by Reuters, while Mashinsky was CEO, between 2021 and 2022, Celsius made about $1 billion in loans to Alameda Research, according to the lawsuit.
And so once again, after looking at what was once a market of opportunities and dreams, and is now looked at with fear and mistrust, we ask: Where do we stand?
Seemingly on the Shoulders of Giants.
While we do not want to mistify or elevate anyone to levels that may seem saintlike, the truth of the matter is that the many big players in the game that didn’t have a lot of stakes in the FTX pie have come out of the troubles stronger than before.
Binance has passed multiple audits to reassure creditors and clients, Coinbase doesn’t seem to have been affected by the fall, and we are now testing new resistances on the upward scale for many of the cryptocurrencies that closed 2022 in shambles.
FTX has been a tragedy made of chances, bad decisions, greed and debauchery, a tragedy that shone a light on the crypto world and like a cleansing fire has reduced the FTX rabble to fertilizer for the rest of the industry. New regulations will come, new protections for the investors that are now scared to employ exchanges as their primary holding spots, and safeguards for institutions that were previously scared of investing in this market, and with those solutions, we can expect a better environment for everyone that has managed to weather this crisis.
And so now, we are here to build up our project, be a part of this new revolution and share our ideals with the many projects partnered with us, in a bid to empower our own slice of the market in ways that will be beneficial in the long term, not only for our investors and users but also for the whole DeFi ecosystem.
About Synapse Network
Synapse Network is developing a cross-chain investment and start-up acceleration ecosystem based on blockchain technology to give everybody an equal chance to contribute to great upcoming projects and to do so early on. We are bridging the gap between the traditional & crypto market. The idea of the Synapse Network technology goes beyond the standard offer of launchpads available on the market, becoming a true technological brand providing tech solutions.
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