i want to tell you about the whole FTX situation because you might have noticed that this past week has not been very good for cryptocurrency investors. We’ve seen a lot of volatility in the space, even with bitcoin ether and tether, a stable coin which briefly unpagged from the US dollar.
And it all seems to be tied to one institution, which is FTX , which, if you aren’t familiar, is the world’s second largest crypto exchange that as of this morning, filed for bankruptcy protection.
Now this is a situation that’s still unfolding and one that’s already been covered by a few others.FTX crypto
But at risk of being redundant, I do want to cover the basics as I’ve had a lot of viewers asking me about the FTX situation and why it’s causing all this volatility.
But then I also want to talk about something that we’ve seen result because of this that I think is worth addressing. But why are we here today?
Well, it has a lot to do with this guy right here, sam Bankman Freed, or SBF as a lot of people call him, who is the founder of FTX and oftentimes viewed as the golden boy of cryptocurrency.
He is someone who is very much an advocate for the space. He’s often seen as being altruistic, as someone who only cares about the long term success of cryptocurrency as a whole.
And he’s worked with lawmakers, he’s been very active politically, and so a lot of people like him in the space. CoinDesk released an article whereby they highlighted that they had seen the private balance sheet of Alameda Research.
Now Alameda Research is another company founded by SBF, and while the two were supposed to be separate entities who obviously aren’t supposed to intermingle, the article sort of highlighted that that might not be the case.FTX crypto
The article highlighted that of Alameda’s $14.6 billion in assets, roughly 40% were FTT tokens, which is the token that’s issued by the FTX exchange.
In addition to a lot of these cryptocurrency assets being either locked up or otherwise hard to sell, it was found that the company also had $7.4 billion of loans of money that it owed to lenders. And the article sort of raised two main concerns.
The first being that the company wouldn’t be able to meet the obligations because of the locked in nature of some of the assets and the fact that some of the cryptocurrencies held might not be worth as much as they were otherwise indicated.
And the second concern, or rumor, was that Alameda Research was borrowing customer assets from FTX and using that to trade and posting FTT as collateral for those assets.
In other words, Alameda Research was taking customer assets and replacing them with the token that the exchange can make, an infinite number of which made a lot of people very concerned. FTX crypto
It led to a lot of people selling their FTT token, which caused the price to drop dramatically, roughly 90% from the beginning of the month, which is bad news for Alameda since that was a key holding of theirs.
It also led to a lot of people trying to withdraw their money from the exchange, with $6 billion allegedly being withdrawn over a 72 hours period before. On November 8, the exchange halted withdrawals, effectively freezing clients money.
And while withdrawals did partially resume, this morning, FTX and Alameda both filed for bankruptcy protection, which really puts into question whether people will ever get their money back.
The whole situation has been very surprising because, again, a lot of people trusted SBF as a figure. But also FTX was seen as one of the few stable operations in the crypto space in the face of companies like Voyager and Celsius.
And we’re starting to learn that a lot of institutional investors had money in FTX and will likely suffer as a result of all this, including the Ontario’s Teachers Pension, because nothing says responsible retirement investment like a company run by someone who played League of Legends during investor meetings and accidentally described crypto as a Ponzi scheme. FTX crypto
But the situation is being felt across the crypto, verse in causing a sell off of Bitcoin and other assets because it’s largely seen as having shaken the faith of institutional investors who had dipped their toe in with the company that they thought they could trust.
And because of FTX’s size and importance in the industry, it could lead to a cascade of other liquidations of deleveraging and other failures in the crypto space from crypto companies. So that’s the situation at a high level.
There are a few other details worth mentioning. For one, even though there’s FTX, the international exchange that’s having this liquidity problem, there is also a company called FTX US, which only operates in the United States.
And FTX has reassured people that the funds are totally 100% backed and that people have full access to their funds. FTX crypto
But that appears to be a lie, because FTX US filed for bankruptcy protection alongside FTX this morning, meaning that all the platforms appear to be in trouble.
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And the second detail worth highlighting is that there was this weird thing around finance the number one crypto exchange, possibly playing a role in the downfall of FTX by helping to spread rumors and then stepping in to claim that they would help take over the institution and bail it out and then walking away from that deal.
So obviously some drama going on there. But with us now generally up to speed on the situation, it brings me to the point that I really wanted to touch on this article which is how FTX was promoted.
Because outside these celebrity endorsements, you might be aware that FTX was a massive sponsor in the YouTube finance space. FTX crypto
Pretty much every big finance creator at some point had an FTX affiliate link or a direct sponsored message. With all the stuff unfolding, we’ve seen creators come out and start responding to the situation with the biggest one that I’ve seen being from Graham Stefan, who, outside of Apologizing for this happening,
also encouraged viewers to withdraw their money from FTX US while they could and I’m not going to break Critters, who promoted FTX US and are now taking responsibility and acknowledging that it might have been a bad idea.
But I do think that it’s a cautionary tale of why crypto companies and centralized institutions in this space are still generally not really worth working with.
There are just not enough consumer protections around cryptocurrency services compared to traditional banks and exchanges and institutions which at the very least have minimum capital requirements, minimum liquidity requirements, and reporting requirements. FTX crypto
A lot of crypto is still in regulatory limbo. They are not treated the same as securities. And even though FTX US highlights that it’s a regulated US exchange, on its website, it discloses elsewhere that they are not registered with the SEC, which is how regular exchanges have to be regulated.
When you actually look at how it’s regulated, at the federal level, it has mostly to do with antimoney laundering laws, and at the state level it’s registered as a money transmitter, meaning that it doesn’t face much more regulation than TurboTax.
If these companies end up going bankrupt, it tends to not be very good for the people with deposits with them, because again, there are not the same safety nets in terms of insurance and other institutions aimed at pooling money together to protect people that you have in traditional finance.
But there’s also the fact that with the bankruptcy procedure, a lot of these companies don’t end up having the assets that they promised they had.
And keep in mind, we had an entire financial crisis because traditional financial institutions that were heavily regulated were trading excessively and leveraging excessively around a stable asset of real estate. FTX crypto
So obviously we’re going to have problems when unregulated crypto exchanges try to do the same thing. So hopefully it’s a learned lesson.
We’ve had this type of problem happened before now. It’s happened with one of the most stable institutions in the space. It should be enough to convince people that maybe crypto services just aren’t it yet.
Maybe we shouldn’t be promoting this through the Influencer Channel because there are so many risks that aren’t being disclosed to viewers when they have this mention or this affiliate link.
And if you really do care about the financial security of the people who look up to you, of your viewers, then you really should take this stuff seriously.
I really do think there should be more emphasis on the risks that people face if it’s going to be involving with crypto. There’s a lot more to discuss about the risks and the lack of safety nets that exist there. Anyway, that’s the situation.
A few takeaways and hopefully this whole situation simmers a little bit. Obviously, the best case scenario is that clients are able to take their money out before we have these companies really shut down. FTX crypto
And I’m not sure what the current situation around withdrawals is given the bankruptcy announcement, but if you find that you are able to withdraw your funds from the FTX platforms, it might be worth doing so before things change again. Be safe out there.