Blog : Crypto

How FTX Blew Up Overnight… In Flames

How FTX Blew Up Overnight… In Flames

FTX, recently valued at $32 billion, has just blown up. But not in the “viral-overnight” sense. More like, a nuclear catastrophe. 

On Wednesday, the largest cryptocurrency exchange on earth, Binance, tweeted that it was terminating its partnership with FTX. Binance stated, “We have decided not to pursue the potential acquisition of FTX as a result of corporate due diligence and the most recent news reports regarding mishandled customer funds and alleged US agency investigations. Initially, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”

And on Friday, FTX filed for bankruptcy, and its CEO resigned.

Not exactly a good day for the company.

So… what the heck happened?

Alameda Research is where it all starts. Sam Bankman-Fried established Alameda, a proprietary trading firm that dabbled in cryptocurrencies, in 2017. They made money buying and selling crypto… and there was a lot of buying and selling going on. After a while, Sam realized he wanted more. He didn’t just want to trade cryptocurrencies himself. He wanted to also get very large financial institutions involved.

So, in 2019, he set up a crypto trading platform called FTX, which became a wildly popular mobile app that had a quick rise to disrupt the financial industry.

If you’re familiar with FTX’s model, they were (emphasis on “were”) a crypto marketplace that would locate a crypto vendor if you intended to make a purchase, and vice versa. When FTX handled a transaction, the company earned a fee. Customers who were willing to place large wagers were also eligible for loans. The exchange imposed interest on this of course. Money was made. RobinHood App, move over.

Except… then it wasn’t. FTX almost went bankrupt due to a “liquidity” problem, according to the media, which essentially meant that the crypto markets were crashing and customers wanted their money back. As in, $6 billion over the course of three days. And, of course, FTX was unable to issue these refunds because they, like any exchange would, had used these customer-earmarked funds for business expansion, under the belief that the crypto market was too big to crash. When it did crash and every Chad and Aidan on earth wanted to cash out the $750 they had sitting in FTX for the next coin rush and FTX had nothing for them, chaos ensued. 

FTX has always had lofty goals. When they launched their trading platform, they also unveiled their own cryptocurrency token called FTT. “We can make our own coin and make serious money with it!” was the big idea. And of course, making your own cryptocurrency costs… money.

So, FTX offered all buyers of their proprietary tokens discounted or free withdrawals and reduced trading fees as an incentive to join their platform. 

The token’s potential began to emerge quickly. The costs started to emerge, too. So FTX started buying its own tokens with a portion of its actual revenue generated from transaction fees, artificially inflated the demand for their own coin by purchasing it in large quantities. 

Basically, FTX created a coin, asked people to buy it for perks, then bought more of their own coins using the money people paid for the coins originally to artificially inflate the value of their coin, so people would buy more.

What could go wrong?

When the cost of FTT started going up, the value of Alameda’s holdings of these coins started going up as well. When the FTT tokens started going up in price, this would greatly benefit Alameda (and Sam, FTX’s founder… definitely not shady).

FTX likely used customer deposits or borrowed money to make loans for trades. But when customers all at once started demanding their deposits back, FTX didn’t have enough to cover everyone’s accounts.

The worlds largest crypto exchange, Binance, was positioned at first to essentially bail FTX out of its situation. But, as mentioned above, they pulled out. In a statement, Binance explained,

“We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.”

Burn. So much burn.

Since its inception, the cryptocurrency industry has battled to win over skeptical regulators, investors, and everyday customers. As a result of Binance’s withdrawal and the decline of FTX, a company that appeared more stable than others, the market has been jolted.

If anything, the FTX crash will turn off institutional investors just as they were starting to warm up to the cryptocurrency space. It may take years to restore faith in the sector’s promise, even though some people will continue to work on interesting projects. Because, you know, crypto.

Tightening screws for crypto companies that make it through the oncoming purge will almost certainly increase. Crypto’s future will be heavily debated on Reddit threads across the world.

Crypto will survive. But for FTX… big, big L. Billions’ worth.
 

But hey. Let’s go make some s’mores in the flames.

Stablecoins and the Crypto dash: What Happened?

Stablecoins and the Crypto dash: What Happened?

Hey, on the bright side, cryptocurrencies have finally untethered themselves from the market. On the downside, it was stablecoins that did it. To some, a new economic platform. To others, a transparent Ponzi scheme. Let’s take a look at how stablecoins are going to permanently disrupt the crypto market.


What is a Stablecoin?


Cryptocurrency is now fairly mainstream. You can buy cryptocurrency on the Robinhood app. You can buy it on Cash app. But that doesn’t mean there won’t be bumps in the road.

A stablecoin is a coin that’s pegged to the value of something else. It’s designed to be, well, stable. For instance, the U.S. currency is technically backed by a gold standard (although it hasn’t really been for some time). Ideally, stablecoins should be a hedge against other risks.

Cryptocurrencies are, of course, notoriously volatile. Just load up Reddit and you can see photographic evidence of people losing millions (and gaining them).


TerraUSD, the Stablecoin That Couldn’t


TerraUSD/Luna was a stablecoin locked into the US dollar. It should, ideally, peg its price on the USD… largely in a way that no one really understood. TerraUSD/Luna was two coins in one. One was stable and pegged (again, theoretically), while the other coin was burned to create that stability. 

What you need to know is that a stablecoin can either be truly backed by a product (such as the stablecoins that are backed by pools of Bitcoin) or a stablecoin can be algorithmically backed. The algorithm seeks to course correct the coin any time the coin diverges from its backer. 

The problem comes when the algorithm needs to create increasingly more volatile swings to compensate for existing instability. With TerraUSD, the adjustments compounded in such a fashion that what should have been a stablecoin catastrophically tanked. As TerraUSD/Luna lost its value, it tried to print more Luna to compensate. This created a virtually infinite loop.


The Consequences of TerraUSD

TerraUSD lost its value within minutes. And that’s not a great thing for cryptocurrency as a whole, because the whole reason people were invested in TerraUSD was to keep their money safe. So, you’ve got this technology that promises that it’s going to be less volatile than crypto, and a great place to save your crypto money, and then it absolutely tanks.

On the one hand, most people investing in AltCoins pretty much know what they’re doing or know what they’re getting into. But on the other hand, anyone investing in stablecoin isn’t looking to engage in risk or make a buck; literally the only reason to be in a stablecoin that matches USD is to keep your money safe, whether it’s between transactions or part of a larger, more diversified portfolio.


Bottom line: Not only did TerraUSD absolutely obliterate its own value, but it also shook investor faith. More and more, cryptocurrency investors are starting to wonder whether crypto is really all that it’s cracked up to be.

The Follow Up Crypto Crash


Well, though, crypto is decentralized, right? So, if crypto is so decentralized, why would TerraUSD cause the entire crypto market to crash?

Actually, there’s good news and bad news there. Good news: a single AltCoin isn’t going to cause the market to crash. If it was going to, Dogecoin would have already done it like eight times.


The bad news is that there were entirely separate issues going on during the whole TerraUSD frenzy; probably issues that also caused TerraUSD to spin out. Part of it started when Coinbase, one of the largest cryptocurrency exchanges, announced that if it had to declare bankruptcy (which, it was going to do), all its wallets would need to be liquidated.


Because, of course, cryptocurrency isn’t considered to be an actual currency, and Coinbase isn’t a bank. That means the wallets that other people had stored on the exchange would be liquidated to pay Coinbase’s debts. 


That led to people mass panicking, selling, liquidating—just generally getting out. That introduced churn that was quickly followed up by the TerraUSD crash.


That doesn’t mean crypto is over, certainly. It’s a great way to transfer wealth, for better or worse. But it does mean that investors need to be a lot more cautious when they read a prospectus. Certainly, don’t just load up any mobile app and start buying coins.


Crypto Billionaire Takes Stake in Robinhood

Crypto Billionaire Takes Stake in Robinhood

Robinhood’s had a pretty bad year, hasn’t it? 
When the Robinhood app launched, it was poised to vastly disrupt the industry of at-home investing. The mobile app made it easy for people to invest from their phones. It gave voice to the often ignored retail investor.
But the Robinhood app eventually betrayed retail investors during the entire GameStop/AMC debacle, ultimately ending up on the wrong side of Reddit. This year has seen Robinhood’s stock regularly tanking… until now.


Robinhood App Surges in Stock Market


While everyone else was going down, Robinhood was going up. Robinhood lost 40% of its value this year, but regained 25% when crypto-billionaire Sam Bankman-Fried took a 7.6% stake in it. Does that mean anything?
Well, maybe.


Sam Bankman-Fried runs FTX, a popular cryptocurrency exchange that has made cryptocurrency far more accessible. The jump in Robinhood’s pricing could indicate a couple of things. First, maybe crypto bros just want to invest in an investor. Maybe they see advantages in crypto expertise.

Second, it could just be the meme. It’s very possible that people simply reinvested in Robinhood because they see “crypto” and they think “good bet.” Really, anything works; people want to believe in the Robinhood mobile app because they want investing to be easy and accessible. Perhaps that’s why it hurt so much that they were betrayed.


The Future of Robinhood


The reality of investing is that it’s designed to protect large fortunes. When you have a David-vs-Goliath situation, David will generally lose out. The skepticism surrounding Robinhood is that Robinhood may very well be ordering trades or making trades in ways that injure smaller investors.


Robinhood has been notorious for pausing trading during times of high volatility. When GME was soaring, they took away the purchase button. Now, that’s not entirely unheard of. The stock market itself stops working whenever there’s a crash.

The problem is that these times of high volatility are generally when a retail trader makes their money. A rich person can put $1,000,000 in a bank account and get thousands back. But if a retail trader is only working with a few thousand to start with, they need to engage in riskier bets.


So, there are a lot of people still using Robinhood. But there are also a lot of people disenchanted with the process. The entire stock market is rigged around not transferring too much wealth in one direction at a time because when that happens, well, the markets crash.


Could a Crypto Billionaire Help?


Well, maybe. A crypto billionaire is certainly more likely to have their finger on the pulse and know what people want. At the same time, we don’t really know what his plans are for influencing the company, even if there are any. The stated reason that he invested was that he saw Robinhood as a good investment. At 40% down from its prior valuation, it very well could have been. A 7.6% stake, even in a company as large as Robinhood, isn’t that much.


But perhaps the news of the stock jump matters. It certainly seems that investors are eager to believe in Robinhood. Robinhood does fulfill a vital position within the investing ecosystem. And if someone were to create an all-encompassing app that was more trustworthy than Robinhood, they would probably be able to capture a significant portion of the market.


Pigs Get Fat, Hogs Get Slaughtered


One thing to remember in all this: It’s not hard to make money in a bull market. The stock market was racing to unseen highs for over ten years. Investors made money hand over fist, not because they were great investors, but simply because they existed.


A lot of retail investors made fortunes. A lot of them lost fortunes. But a disproportionate amount made money just because they weren’t screwing up badly enough to compensate for the sheer market inflation.


Now that we’re in a bear market, we’re going to see a lot more losses. We’re going to see “great investors” lose their shirts. And we’re going to see our day-trading uncles suddenly wonder why it’s “so hard.” How that impacts Robinhood remains to be seen.

Celsius Froze Crypto Withdrawals: Here’s What It Means for Crypto

Are we tired of this yet? The crypto market has never been as disrupted as it has been by its own community. Celsius (another big bad crypto marketplace) froze crypto withdrawals because, frankly, it was insolvent. Voyager this week just filed for Bankruptcy. Now Coinbase is selling off all its information to ICE—a government organization—because it’s about to declare bankruptcy.

What does this all mean for crypto?

It’s Not a Pipe Dream, But It Could Have Been Too Early

You know, there was a company that tried to bring television to the internet. It was going to disrupt cable. But it did it too early. (This is famously a Mark Cuban fail, but really he was right, ultimately.) They tried to bring television to the internet before the internet had the bandwidth to support it. So, they crashed and burned.

We have Bitcoin, and it’s a great idea: a global decentralized currency. But if you were an early adopter like me, you remember that within a year of mainstream attention, the Blockchain was so large that no one could feasibly download it anymore. And then people keep losing thousands upon thousands of Bitcoin, worth thousands upon thousands of dollars.

So they start moving to marketplaces and exchanges. And the second they did that, it’s no longer decentralized. Now it’s in control of a few companies because the most popular companies are the ones that have the market share. And here we are.

The Perils of Deregulation

Deregulation is great when you aren’t getting taxed and no one can trace your money. The flip side to that is the scammers who stole your money also can’t be traced and aren’t getting taxed. Now, once crypto hit the Robinhood App and even Cash App, better controls started to be instituted.

But crypto marketplaces still aren’t banks. They aren’t controlled or regulated by anyone. And yes, they can just disappear with your money.

As Coinbase pointed out earlier in the year, the money in their coffers isn’t even technically yours. Their bankruptcy could have led to the dissolution of all the money held in their wallets.

So, we’ve got marketplaces that are in charge of your money and poised to disrupt crypto, and they can basically do whatever they want. They can take away that “buy/sell” button (like the Robinhood app did) at any time because they aren’t regulated. They aren’t a financial institution.

Now, that doesn’t actually mean they can commit fraud. They can’t promise to keep your money and then throw it away. But if you look at your Terms of Service, you will probably discover that they have a lot more rights to your crypto than you do.

Going Back to the Foundations

Of course, that doesn’t mean that crypto was a terrible idea, or that it can’t still disrupt global currency. Primarily, the issue is that early crypto technology has always been so unwieldy that there’s really no way to interface it except through a third party. These third parties strip away a lot of the benefits and protections related to crypto in exchange for ease of use.

So, to really disrupt the crypto market, we need to start using crypto more intelligently. Yes, crypto was made for engineers. But for actual adoption to really surface, it has to be usable by people who don’t have a computer science degree. You know, something like an easy-to-use mobile app.

As for now, here’s what you need to know about the crypto market: It’s bad. That’s not to say you shouldn’t fill your pockets with cheap coin, but the problem is that crypto is essentially a faith-based economy, and people are getting crushed. Now that people can’t really trust their marketplaces to actually give them their money, they are turning away from crypto en masse. That doesn’t mean you should listen to the panic on Reddit… but you should probably be a little more cautious with your yolos.