The Collapse of FTX
What happened? A subcontracted answer.
The epic collapse of Sam Bankman-Fried’s FTX is a surprise to many.
That’s a problem.
It has been abundantly clear for quite awhile that the “crypto” industry was due for a shake out. Massive risk-taking using leverage collateralized by illiquid altcoins was a recipe for disaster. The Terra-Luna ecosystem was only the initial domino, combined with a rising cost of capital, that kicked off a wave of financial stress guaranteed to ripple through the sector —> Terra-Luna —> Celsius —> 3AC —> Voyager…. The tsunami has not abated.
I’m bullish on the long-term outlook for the space but have been pointing out these significant downside risks for most of 2022.
So, what exactly happened to FTX? I’ve received numerous iterations of this question the last 5 days from friends, colleagues, and my students.
I’m working on another piece right now to provide readers a global macro update. Therefore, I’m going to subcontract my answer to the FTX question to a few highly recommended newsletters and YouTube channels.
I recommend consuming the following links in the order I post them.
The first question to answer is this — “how did FTX actually fail?”. My friends at The Bitcoin Layer (Nik Bhatia & Joe Consorti) are well equipped to answer this question. Their piece, “Binance Launches a Speculative Attack Against FTX, and Wins” explains how a illiquid balance sheet, combined with a social media influenced bank run, never results in desirable outcomes. FTX / Alameda Research tipped their hand and the attack was on.
Another great reporting of the events surrounding the collapse was written by Bitmex founder Arthur Hayes. I recommend his Medium if you’re looking for commentary on crypto, macro, and finance. Here is the post on the FTX collapse.
https://cryptohayes.medium.com/speechless-9b1b5114bb2c
In the piece, Hayes goes into detail discussing how FTX’s failure to learn each of the lessons mentioned by CZ Binance contributed to the collapse.
Wrapping up the aftermath of the collapse is another piece from The Bitcoin Layer. Potentially true or not, speculation abounds as everyone tries to figure out how it is the crypto industry finds itself in this situation. Nik and Joe point out some of the theories making their way across the internet. They also give credit to members of the bitcoin community that were telling the world, long before the collapse, that something didn’t smell right at FTX.
On the subject of predicting this collapse — it should be pointed out that this was predictable. Many in the crypto and finance communities have been skeptical of SBF and the story behind his rise to wealth and fame. To provide one example, check out this video where Marc Cohodes explains clearly why he believed FTX was a fraud.
Finally, here is a piece where Mish Shedlock attempts to keep his readers updated on the most recent developments in this saga. Including the chapter 11 bankruptcy announcement from FTX, liquidity intervention by Justin Sun of Tron, and the fate of FTX’s many sponsorships.
https://mishtalk.com/economics/ftx-us-declares-bankruptcy-too-what-about-the-ftx-arena
TL;DR — if you only have 99 seconds to learn about the FTX collapse, I recommend watching this video from Nobody Special Finance. It’s a fantastic summary.
If you have more time on your hands — hedge fund manager and university professor, Patrick Boyle, has put together a deep dive into the FTX bankruptcy. I recommend watching every video Patrick publishes on his YouTube channel, Patrick Boyle on Finance.
One final video. This one from Coffeezilla providing an up-to-date recap of events as of November 12, 2022. This situation is truly astonishing. FTX was not a company run by geniuses. That much is clear.
Conclusion
The invention of bitcoin, and more broadly decentralized finance, was about creating an alternate system in which trust in 3rd parties is unnecessary.
FTX was a totally centralized, trusted 3rd party — the antithesis of Satoshi’s rationale for bitcoin’s creation. Claiming the failure of this company, one that avoided scrutiny through marketing and political & regulatory capture, is an indictment of decentralized finance is short sighted at best and ignorant at worst. I encourage readers to think critically about who is to blame.
To be sure, bitcoin has nothing to do with the decision of centralized institutions operating in this industry to take excessive risk and perform shoddy due diligence on financial counterparties.
This was more than the failure of FTX. This was a failure of customers, regulators, investors, lenders, and an entire industry to learn from the lessons taught by hundreds of years of financial history. Whenever large amounts of leverage are combined with excessive risk taking, illiquid collateral, trust in counterparties, and shrinking cash flows — the story always ends in tears.
— Brant
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