Monday, November 7, 2022 is when the FTX unraveling started to reveal the unthinkable in the crypto space, by the end of Tuesday November 8, 2022 it became evident that this would begin to spin out of control, by the next morning the fears of investors on the FTX platform became extremely real and by Friday November 11, 2022 FTX and FTX U.S. filed for bankruptcy. This Chapter 11 process is including not only FTX but it’s “Trading Sister Company” Alameda Research and over 130 associated companies. This is a story that hasn’t fully unraveled as of yet but there is sure to be more fallout as the days go by.
FTX raised an enormous amount of capital in the $2 Billion range from reputable and well respected investors such as Paradigm, SoftBank, Sequoia Capital, Temasek, Tiger Global Management and the Ontario Teachers’ Pension Plan. This was valuing the crypto exchange in the $32 billion range, this does not include the celebrity endorsers that plugged the exchange on social media, television and other media outlets. The likes of NFL legend Tom Brady and his ex-wife Gisele Bundchen, NFL quarterback Trevor Lawrence, NBA champ Stephen Curry, tennis star Naomi Osaka, NBA legend Shaquille O’Neal, MLB pitcher Shohei Ohtani, MLB legend David Ortiz and NBA star Udonis Haslem were FTX ambassadors according to reports.
All of that $32 billion valuation and the hard cash investment in the $2 billion range pulled a Houdini trick and disappeared. This is a Showtime series waiting to happen if ever I saw one, it has a cast of characters that you could not make up from prominent business people, government officials, top dogs in U.S. securities regulation arena all the way up to the White House. This is a scandal right up there with Bernie Madoff but within the digital world.
The collapse of FTX in a booming market just shows how green the founders were in the aspect of trading, over-leveraging and basically setting the stage for what was destined to happen and that is total collapse. This is by far the most damaging event that has taken place in the centralized cryptocurrency exchange space, how their seasoned investor didn’t see this coming is one of the mysteries of the world of finance.
Now I said centralized cryptocurrency exchange space for a specific reason, this event in no way dampens the decentralized finance arena, it only strengthens it. If FTX was a decentralized cryptocurrency exchange then this would never have happened, it would have been impossible for it to happen and there goes the issue. It all comes down to the regulation of centralized cryptocurrency exchanges, laying the ground rules for engagement, putting limits on risk tolerance and preventing events like this from occurring in the future. The decentralized market is essential but it can’t do it alone, there has to be a combination of traditional finance along side decentralized finance in order to create a pathway to the future where the power of blockchain and utility of digital assets work hand in hand to help traditional financial institutions to evolve over time. This isn’t a replacement vehicle but more of an enhancement vehicle for the benefit of society.
Bitcoin is the prime example of a decentralized digital asset that will stand the test of time, it is seen more as a store of value or a commodity type of digital asset but in it’s truest form it is limited to that. Building on Bitcoin requires bridges and third party systems that can be breached, I’m sure there will be some very smart people out there that will figure how to do it securely and without slowing down the network at some point and it by no means lessens its value. There are other digital assets that have similar qualities as Bitcoin does but were created with more modern technology, Ethereum is the closest example of that but recently they made a major upgrade from proof of work to proof of stake to reduce it’s carbon footprint but in doing that they may have opened themselves up to being looked at as a security. Pecu Novus is a decentralized network just as Bitcoin and Ethereum are but instead of proof of work or proof of stake, they use proof of time. It is seen as store of value such as a commodity would be seen but with one inherent difference, the integration of systems into the blockchain creating a highly secure bridge that is protected by the network, so it becomes highly scalable without impacting the integrity of the network.
Other networks such as Avalanche, Solana and NEAR, all possess great value as far as their blockchains are concerned. The issue here is that FTX either invested or holds enormous amount of tokens in hundreds of different projects, Solana and NEAR being two of them, Avalanche and Pecu Novus from what is gathered have no exposure to the FTX debacle, which is a positive. FTX didn’t just invest in layer-1 blockchain protocol projects but they also invested in the likes of a traditional financial firm in Skybridge Capital and the US Dollar pegged stablecoin USDC issued by Circle, a regulated fintech group.
The long and short of it is this, decentralized finance or decentralization in itself is supposed to put the custodianship of digital assets in the hands of the owner, not a centralized custodian. It has been said after each centralized implosion “Not Your Keys, Not Your Coin” , this is so very true, until the time regulation is upon the digital asset space it can be downright dangerous to put trust in a centralized exchange that isn’t regulated. Coinbase is regulated and their leveraging of any digital asset has to be limited and I’m sure Binance has secured some type of regulation for their exchange as well as I believe allowing their account holders to control their own keys. I cannot speak for other cryptocurrency exchanges but what I can speak to is investors controlling their own keys.
Control your keys and protect your digital assets, when you relinquish control of that, it is the equivalent of signing over the deed to your home, the title to your car or adding a person to your bank account, anything can happen and usually does. So I implore investors in digital assets, whether it is a coin, token or NFT, control your keys, work on a peer to peer basis, if you are not using a reputable or regulated exchange then opt to use a decentralized one where you can control your ownership. You may not find the extreme liquidity but you will not run the risk of losing it all because of a few bad actors.
As far as bad actors are concerned, in closing, investors in digital assets need to do their due diligence. If a project is not vetted for viability or legitimacy by a reputable source then you need to be very careful, beware of airdrops and other nonsense marketing that will draw you in for all the wrong reasons. If a project is viable then it will grow and be seen as such, as Public Enemy put it “Don’t Believe The Hype”
Managing Partner – FGA Partners