FTX the FTT token and a crypto Lehman moment
We're making volatility great again
This article is going to be short and high level. If you want a succinct summary of what’s happening and what the possible implications are, read on. If you want to dive deeper into this debacle I would recommend reading these three articles.
The battle between FTX and Binance: why, will FTX crash?
Is Alameda Research Insolvent?
What’s going on in cryptoland?
FTX is a huge exchange that used to be based out of Hong Kong but last year they moved to the Bahamas. On the spectrum of regulation and abiding by laws, FTX falls closer to Wild West than fully regulated. That’s allowed them to do some wacky shit and get away with it. Most importantly, FTX and Sam Bankman-Fried (Scam Bankman-Fraud) have an incestuous relationship with Alameda Research which is a huge crypto hedge fund that has a totally unfair market advantage with behind the scenes order flow data from FTX that lets Alameda trade around and/or against all the millions of retail punters on FTX. Beautiful, isn’t it.
At some point FTX created the FTT exchange token and Alameda Research ended up buying a bunch of the coins. Or FTX just gave them to Alameda for a packet of cookies and promise, who the fuck knows. Doesn’t matter. Point is Alameda got a bunch of these exchange tokens and used them as collateral to take out enough loans to buy a small African nation. That was fine in the bull market when people were paying $500k for monkey Jpegs, but now we’re in the bear and nobody gives a shit about nearly worthless exchange tokens. FTT has almost no trading volume or natural demand and was only maintaining its value because nobody was selling it en-masse.
Well, that changed a few days ago. CZ, the geeky looking billionaire at the helm of Binance, recently tweeted out that Binance is going to dump all its FTT tokens. CZ promised to do it respectably and spread out the sales over the course of several months, but those promises didn’t matter. Blood’s in the water and the sharks are frothing.
People have started selling FTT and while FTX tried to unofficially peg it around $22, that worked out as well as BOJ’s desperate bid to stop the Yen from going belly up. The peg’s been bust and now FTT is in free fall. It’s down 30% in the last 24 hours and has dropped 2% since I started writing this article 15 minutes ago. Fun times.
Implications?
I’m not saying that this is going to happen, and in fact I don’t know what the probability is, but there is at least a non-zero chance that this could be a Lehman moment for crypto.
FTT is having a myocardial infarction so Alameda is getting margin called and probably has to firesale a bunch of crypto, which I speculate is why the markets are down in general. Everyone is taking their crypto off FTX and while I don’t think the exchange is insolvent, we don’t know what kind of funky shit is going on there. We don’t know how *systemic* this is all going to turn out to be.
The extent of the mess will all come down to size. The size of Alameda’s loans, how much money people withdraw from FTX, whether the exchange is fully backed, etc. If FTX has to pause withdrawals, woh buckle up friends. Tray tables to their upright positions, the captain has advised for a rough landing.
I want to be fully clear that I’m not claiming that Alameda Research is going to blow up, the crypto markets are going to nuke down and I’m especially not claiming that FTX is insolvent because I have zero knowledge of that. I just want to state that any of these things may be possible, and it’s always better to prepare for the worst and be pleasantly surprised to the upside.
What are the action steps?
If you have any FTT I would recommend selling it. If you have any crypto on FTX I would withdraw it now. Other than that, prepare your limit orders. If this shit truly goes south, we could get a remarkable buying opportunity just like March 2020 or the slightly less drastic drawdown opportunity we saw in June when Three Arrows gave up the ghost.
If we do go limit down I don’t expect us to hang out there long. I expect there will be a lot of buying and we’ll get a v-shaped recovery from the lows. So if you’re planning for a long term investment in crypto, I would say that now is probably going to be the time to make that happen.
I have an initial large buy order set for ETH at $1,050, although depending on market action I may set that limit order lower. I’ll for sure set another limit order somewhere around $750 or so.
Stay frosty.
