09 Nov 2022

What a farce: FTX collapse and its implications

I am beyond disappointed. The FTX situation is extremely bearish, will impact the regulatory outlook, dampen institutional presence and likely keep us at painful lows for at least 6-12 months.
I am beyond disappointed. The FTX situation is extremely bearish, will impact the regulatory outlook, dampen institutional presence and likely keep us at painful lows for at least 6-12 months. Hindsight is 20/20 – but I did not see this coming. 2022 has been an awful year on multiple accounts, and we’ve watched it all gradually deteriorate and meltdown in front of our eyes.
My take: TLDR
  1. Very bearish.
  2. This will likely have negative regulatory implications on the market.
  3. This will likely lead to a further dampening of institutional presence in the market.
  4. This will likely have contagion implications, likely to be reflected in BTC facing new legs down.
  5. A new trading range will appear, analogous to the non-eventful price action since July.
  6. I reckon this range will last painfully long (6-12 mths).
  7. Altcoins, particularly layer 1-s, and specifically the Solana ecosystem, will suffer massively. Do not buy the dip.
  8. Binance is consolidating its leadership role in anticipation of Fidelity, Schwab, Citadel, and more taking market shares. We will see this evolve in the coming years.
  9. All in all, this has been a defining structural shift for the market, and correlations to other assets will plunge.
  10. ETF dismissals have attracted retail to risky platforms. The prudent response is to approve a BTC ETF, facilitating trading of paper bitcoin through a sound environment run by adults.
Easy come, easy go
Luna was a predictable collapse. An unsound scheme, falling under its own weight as soon as buying demand turned into selling pressure. It got big, and for some reason, industry behemoths such as 3AC and Jump Crypto trusted it, and it collapsed. The ramifications of the collapse were immense. There are no adults in the room. 3AC borrowed funds from trading desks and “crypto banks” with God-awful risk management, propping up 3AC’s ability to audaciously position for a super cycle. Celsius, BlockFi, Voyager, Genesis, Babel. The risk some of you have taken has been calculated, but man, are you bad at math. “Crypto banks” lending out retail deposits for funds to take astronomic risks in an already pressured market. Zero prudencies involved. The commoner bears the consequence. Miners. I understand the miner collapses. The ease of access to external capital and incentives to make gutsy bets are understandable. Some will fail, and some will succeed. Circle of life – it’s business, and in isolation, this has been a relatively regular business cycle in BTC mining. FTX. Where do I even start? I admired FTX and Sam, a group of quants finding gold in a BTC-related FX arb with the yen, using the fortune to launch an exchange behemoth. I am sorry for not being able to expose their vulnerable model and not pointing fingers at the iffy structure between Alameda and FTX. FInformation regarding FTX is currently unclear. Rumors are abundant, but it seems like FTX has, among other nefarious activities, lent customer funds to Alameda. I am sure credit lines with Voyager and BlockFi also played a role. Maybe even some exposure to 3AC. I am also pretty sure that the Binance LOI and ensuing DD process will materialize in a no-deal scenario. Behind the headlines, retail and institutions suffer massive losses. It will for sure have a long-lasting negative impact on the market. See yesterday's FTX deep-dive for an already out-dated coverage of the FTX situation. Essential Tweets from the last 24hrs: FTX announcement, Binance announcement, Brian Armstrong thread, Cobie, UpOnly Stream Yesterday (Capturing the absurdity in real-time), overview of FTX's biggest investors, Hsaka + Brian, Hsaka's feed in general from the last few days.Contagion. The unfortunate buzzword of 2022. The unfolding FTX situation will likely lead to dire times. The collapse is likely to impact many other desks. I currently brace for another leg-down and a prolonged bear market. The lack of adults in the room has spawned a credit crunch with an absurd scope.
This feels outright giga bearish for BTC and the rest of the market
Sam – A darling turned villain
While polarizing, Sam Bankman-Fried has been the regulatory darling of the industry. An odd character, vibrating while speaking but eloquently pushing the ball on crypto in the faces of regulators. Sam has been to Congress multiple times in the last year, and he’s the second-largest donor of Biden, for God’s sake. His regulatory stance distanced him from a lot of the crypto community a few weeks back, but he sought to make compromises and had a direct line to key regulators of the space. The reputational collapse of Sam will likely be reflected in a reputational blow for the industry as a whole. Regulators will have a hard time trusting insiders for the foreseeable future. This is bad for the industry, as the outcome may very likely be harsher regulation. Sam has also been the institutional darling of the industry. Reputationally, FTX has been a fundamental source of institutional curiosity in the space. FTX’s series B featured BlackRock, Tiger Global, Temasek, Sequoia, VanEck, and the Ontario Teachers Pension Plan to name a few. Not finding crypto investments worth the risks would be a natural reaction from TradFi giants providing capital to FTX, who likely was deemed as the most trustworthy character in the space up until recently.
Hello contagion, my old friend
The contagion effects are going to be ever so present. BlockFi and Voyager are already fucked, but more will come. We will monitor this situation closely. Recommend keeping coins of exchanges, and in particular of any interest-bearing products. While contagion this time around may impact institutional crypto banks rather than retail, risking your capital for a few-percentage yield is definitely not worth the risk. This is immensely bearish for altcoins, particularly alternative layer-1s, specifically the Solana ecosystem. Both BTC and ETH have some sense of established value in the market. BTC will survive this rodeo. However, BTC will suffer related to contagion, in addition to a reputational blow leading to possible institutional distancing from the market. If Silvergate is impacted, it may have spillover effects on MicroStrategy, leading the whole rodeo of 2020-2022 to close in circle. The Binance consolidation is concerning. Binance dominates the spot and derivatives market, and this will only lead to further consolidation. The 14-year-old history of bitcoin has not been kind towards extreme concentration in one marketplace. In sum, BTC holders should prepare for dire times. The last few months have seen low volatility and no material price action. Few willing sellers are offset by few willing buyers. In my view, this collapse will extend this state of numbness in the market. As information clears into the market and risks get priced in, I expect a very dull consolidation range to appear and, thus, also correlations with other assets to decline. This is a defining structural shift to the crypto market.
Changing structure
If I were a regulator seeking to protect people but with a painful awareness of people's desire to dabble in crypto – I would approve an ETF ASAP. While this goes on accord with the “not your keys, not your coins” mantra roaring in bitcoin, it makes sense from a regulator's point of view. Retail traders holding paper exposure in BTC will not have access to credit markets or crypto derivatives platforms. An approval will inherently limit the impact of access to greed-provoking alternatives. At least, it will provide more accessible, less wild exposure to markets. The crypto market structure will be vastly different three years from now. It is my view that Binance aggressively consolidates power now as they brace for the challenges ahead. In the last few months, we've seen headlines suggesting that Fidelity, Schwab, Citadel, BlackRock, and Nasdaq are in the process of offering new suits of crypto products, in addition to a multitude of traditional banks entering the space. Binance will face external competition in the years to come, and consolidation ahead of the inevitable is the most sensical strategic decision.
Wrapping it up
This has been a truly embarrassing couple of days for crypto. The events that have occurred are likely to have severe implications related to both regulation and contagion, and I expect the effects to be felt in the market for a long time. Let these painful depths of hopelessness remind you that crypto is a wild west. Risks are high. Trust no one. Shoot me a message if you’re feeling down. We are all in this same awfully embarrassing boat. Let these painful depths be a reminder to appreciate Bitcoin’s bland and boring structure. Bitcoin’s non-existent DeFi, few layers of complexity, and Bitcoin’s steadfast inflation schedule leading us toward 21 million orange coins. A predictably scarce asset in an unpredictable world, on a layer that allows you to transfer value to whomever you want, whenever you want – without the need for a trusted intermediary.
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