You know that crypto speculators have been suffering. Big drops in the value of cryptocurrencies have exposed some of the firms that were swimming naked when the tide went out. Now, the founder of FTX, Sam Bankman-Fried, a mega-crypto owner, says that there are certain crypto exchanges that are already operating in insolvency. Forbes’s Steven Ehrlich reports:
The question on everybody’s mind in the crypto world is whether we’ve reached the market bottom. Nearly $2 trillion in crypto market value has evaporated since November. Two bellwether digital assets Luna, a $40 billion crypto asset associated with TerraUSD, a $16 billion stablecoin designed to maintain parity with the U.S. dollar, have collapsed. Earlier this month bitcoin traded for below $20,000, its lowest level since December 2020.
But the fallout is far from complete. Earlier this month, Singapore-based Three Arrows Capital (3AC), a highly levered crypto trading firm with $200 million of exposure to Luna revealed that it was nearly insolvent. Three Arrows’ had borrowed large sums from numerous crypto firms including New Jersey’s Voyager Digital and New York-based BlockFi. In order to survive Three Arrows default, the two digital asset exchanges turned to billionaire Sam Bankman-Fried, founder of FTX and the richest person in crypto, worth some $20.5 billion. Between FTX and his quantitative trading firm Alameda, he provided the companies with $750 million in credit lines. There is no guarantee that Bankman-Fried will recoup his investment. “You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers,” he says.
Bankman-Fried’s cash infusions are far from altruistic. He has emerged as a smart vulture capitalist in the beleaguered crypto market, knowing full well that his own fortune depends on its healthy rebound and growth. Bankman-Fried has also bought into crypto brokerage Robinhood, where FTX has already accumulated a 7.6% stake, and is rumored to be considering an acquisition.
Bankman-Fried denies any active merger talks with Robinhood but tells Forbes that more crypto exchange failures are coming. “There are some third-tier exchanges that are already secretly insolvent,” says Bankman-Fried.
Fried’s FTX, along with Coinbase, Kraken and Binance, are giants among digital asset exchanges. They have millions of customer accounts and functionally they operate similarly to online stock brokerages. But outside of these whales, there are more than 600 crypto exchanges around the world operating in a largely unregulated frontier. Never heard of AAX, Billance and Hotbit? You aren’t alone, but like Coinbase they trade bitcoin, ether and dogecoin and offer generous margin loans–as much 20 times their initial capital— to their clients. Lacking any meaningful regulatory oversight many crypto exchanges have been vulnerable to scammers and hacks.
Action Line: Speculating in lightly regulated crypto markets with fly-by-night exchanges that may or may not be solvent is about as risky as it can get. If you want to invest, really invest, you need a plan that puts generating income ahead of gambling on future prices. If you need help building a plan like that, please get in touch with me.
