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4 Reasons the Fall of FTX is Good for Bitcoin

  • Jan 17, 2023
  • 5 min read




What was the logical response to the news that FTX was in trouble? Sell all your Bitcoin or move all your FTX custodied Bitcoin off that exchange and into cold storage. The second option was the most logical, and the first the least logical. If everyone was blessed with a perfectly logical brain, Bitcoin should not have been affected by this event. FTX did not fail because Bitcoin was bad. FTX failed because SBF was a dirty rotten scoundrel, and he stole billions of dollars out of the playbook of Bernie Madoff. Against this backdrop, let me walk you through four reasons why the FTX failure is good for Bitcoin.


1) Stronger Exchanges

Crypto exchanges are important, and healthy crypto exchanges are important for the continued growth in Bitcoin adoption. New entrants need a place to safely buy their coins - places where they can convert their defective fiat currencies into digital gold. In my opinion, that is the only role for exchanges. As soon as the purchase is done, you want to move that Bitcoin directly into a self-custody wallet and never sell! The question is whether we want centralized or decentralized exchanges. In the wake of FTX, exchanges scrambled to assure investors they were solid by publishing proof of their reserves. This was quickly derided as being useless - what is the use of publishing the value of your assets without the value of your liabilities? Binance, the largest crypto exchange, used global auditing firm Massars for this report. CZ mistakenly referred to this report as an audit. Massars were quick to distance itself from this statement and then removed the report from its website and cut ties with Binance and other crypto exchanges as they weighed up the risk and reward of their association. They obviously decided that it was 1 point of return for 100 points of risk.


FTX highlighted the risk of centralized exchanges that can be run like unregulated banks. FTX was using customer funds. They were co-mingling funds in the same way as a fractional reserve bank. Banks take in your money and lend it out. FTX was taking in customer funds that were used to buy FTT tokens which were then lent to FTX-associated companies and used as collateral for fiat money loans. That is essentially how the fraud was executed. This is why CZ from Binance came out saying there was no co-mingling of assets and all assets and liabilities were backed one for one. In other words, if everyone withdraws their funds at the same time from Binance, the exchange would not break and you cannot help but believe the Chinese Canadian billionaire head of Binance. While fighting off the FTX fallout, CZ was hit with another body blow. The US Justice Department announced they were preparing an indictment of the CEO for money laundering, claiming the lax KYC and AML controls of Binance had made it possible for criminals to launder billions of dollars since its inception. Reuters then broke the news that the Justice Department was not unanimous in the decision to pursue these charges which seems to have let CZ off the hook. Prior to this Reuters article, billions of dollars of assets were taken off Binance in what could only be described as a run on the exchange - and as of writing this, Binance is still standing. This was a magnificent test of fire for Binance and other major exchanges, but highlights the danger of centralized exchanges and emphasizes the importance of self-custody of crypto assets.


2) Proof of Work

The FTX saga taught us that not all cryptocurrencies are created equal and this is the reason why the Securities and Exchange Commission differentiates between cryptos that are securities and commodities. Securities are issued - commodities are mined. The FTX token (FTT) was issued by SBF and his satanic crew. So this is where it gets crazy. Assume investors deposited $100,000 with FTX and converted that into FTT tokens. Those tokens were then lent to SBFs affiliated companies (the most prominent being Alameda Research) which used those tokens as collateral for loans. Initially, crypto lenders would not lend one-for-one on the $100,000. They typically would apply a haircut on account of the general volatility in crypto assets. Let's assume a 50 percent haircut - on a face value of $100,000 FTT tokens they would lend Alameda $50,000. However, the value of the FTT token started to skyrocket on the back of FTXs aggressive marketing. They hired Larry David for a Superbowl ad, they brought Tom Brady on board as a spokesman along with Mr. Wonderful Kevin O Leary. They put their name on sports stadia, made political donations, and lobbied in Washington. That $100,000 in tokens was soon worth $1 million allowing Alameda to borrow $500,000. SBF issued more tokens into the rising price - they were printing money and then borrowing money against their fake money. FTT was not a commodity. It was not mined. There was no scarcity to it, and the worst part of it was there were no rules to the game. They were not required to have internal controls or divisions of functions. SBF was trading on the exchange using other people's money and his girlfriend (whose father was at some point the boss of the owner head of the Securities and Exchange Commission Gary Gensler) was in the back office settling the trades. All the top employees lived in the same Bahamian mansion hopped up on amphetamines and living the life. SBF was buying multi-million dollar homes for his parents. The Hollywood script almost writes itself.


3) Flushes Out the Weak Hands

In order to move out of this Bitcoin winter which has seen the price collapse from $68,000 to $17,000 we need to flush out all the weak money so that all that remains are the strong hands - those who are committed to the long-term future of Bitcoin - the HODLERS. We need to flush out the speculators, the hot money, and all the heathens who think Bitcoin is a short-term fad. FTX spooked the living shot out of lots of people and has done a good job in flushing the weak money out. We are closer to hitting pay dirt - there could be more downside but FTX has helped to bring us closer to the bottom. The Fed also plays an important role in helping us find this bottom. The prices of stocks and Bitcoin are correlated. It is hard to see how Bitcoin will bottom out and rally while the Fed continues to raise interest rates and suck liquidity out of the system.


4) Accelerated Regulation

We can expect greater regulation of crypto going forward. Purists are violently against government intervention but if you want Bitcoin to compete with other asset classes and attract the big institutional money, we need more rules and regulations. FTX brings us one step closer to more regulation - let's hope that the rules are wise and constructive, and do not constrict the life out of this new and beautiful market,


 
 
 

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