After throwing lifelines at struggling digital currency platforms BlockFi and Voyager Digital, Sam Bankman-Fried, the 30-year-old billionaire founder of FTX, warns that some crypto exchanges will soon fail.
JThe question on everyone’s mind in the crypto world is whether we have bottomed out. Nearly $2 trillion in crypto market value has evaporated since November. Two flagship digital assets Luna, a $40 billion crypto asset paired with TerraUSD, a $16 billion stablecoin designed to maintain parity with the US dollar, crashed. Earlier this month, bitcoin was trading below $20,000, its lowest level since December 2020.
But the fallout is far from total. Earlier this month, Singapore-based Three Arrows Capital (3AC), a highly leveraged crypto trading firm with $200 million exposure to Luna disclosed that it was nearly insolvent. Three Arrows had borrowed large sums from numerous crypto firms, including New Jersey-based Voyager Digital and New York-based BlockFi. In order to survive the default of Three Arrows, the two digital asset exchanges turned to billionaire Sam Bankman-Fried, founder of FTX and the richest person in crypto, worth around 20.5 billion of dollars. Between FTX and his quantitative trading company Alameda, he provided companies with $750 million in lines of credit. There can be no assurance that Bankman Fried will recover its investment. “You know, we’re ready to do a bad deal here, if that’s what it takes to stabilize things and protect customers,” he says.
“We’re ready to make a bad deal here, if that’s what it takes to stabilize things.”
Bankman Fried’s cash injections are far from altruistic. He has become a smart vulture capitalist in the beleaguered crypto market, knowing full well that his own fortune depends on his healthy rebound and growth. Bankman Fried has also bought crypto brokerage Robinhood, where FTX has already amassed a 7.6% stake, and is rumored to be eyeing an acquisition.
Banker Fried denies any active merger talks with Robinhood, but tells Forbes that more crypto exchange failures are to come. “Some third-tier exchanges 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 work similar to online brokerages. But aside from these whales, there are over 600 crypto exchanges around the world operating in a largely unregulated border. Never heard of AAX, Billance and Hotbit? You’re not alone, but like Coinbase, they trade bitcoin, ether, and dogecoin and offer generous margin loans — up to 20 times their original capital — to their customers. In the absence of any meaningful regulatory oversight, many crypto exchanges have been vulnerable to scammers and hacks.
Japanese exchange Coincheck was hacked for $530m in crypto in 2018, Singaporean exchange KuCoin lost $275m in 2020, then in December 2021 Cayman Islands-based Bitmart was hacked for $200m of dollars. In 2016, Bitifinex was hacked to the tune of nearly 120,000 bitcoins with a current value of $2.5 billion.
But, despite the generous bailouts, not even Bankman-Fried is able or willing to chase good after bad in perpetuity. “Some companies are fundamentally too far behind and it’s not practical to support them for reasons such as a large hole in the balance sheet, regulatory issues or there aren’t many companies left to rescue,” says Bankman-Fried. , which declined to name specific crypto exchanges.
As Forbes reported in its analysis of the top 60 crypto exchanges in the world, the digital asset exchange industry generally lacks standards for certifying a new entity before or after it begins soliciting funds from clients. The SEC does not regulate exchanges and the Commodities Futures and Trading Commission only oversees a handful of crypto derivatives markets. In the United States, there is no member organization like FINRA to self-regulate crypto exchanges.
Banker Fried worries about continued failures as during the euphoria of rising crypto prices, exchanges continued to raise the bar to entice customers with generous returns for deposits. BlockFi or Voyager promised yield payments to customers, over 12% per year which were to be paid for either by at least charging borrowers much more interest or more likely, by putting that money to work in funding DeFi applications decentralized. It worked well when the crypto was going nowhere but up. It looks disastrous now.
Like JP Morgan during the Panic and Stock Market Crash of 1907, Bankman-Fried is taking advantage of the crypto chaos to expand its empire. He recently completed the acquisition of Liquid, a struggling Japanese exchange. BlockFi and Voyager Digital are in its grip and despite its denials, Robinhood could be next. According to sources familiar with its loans to Voyager, FTX is likely to lose at least $70 million of the credit it has already extended. In 2021, publicly traded Voyager’s Digital had a market value of over $3 billion. Today, it shares the trade for pennies and its market cap of $62 million indicates an imminent bankruptcy filing.
Despite the carnage, says Bankman-Fried Forbes that FTX remains profitable and has been for the past 10 quarters. FTX’s biggest rival, Coinbase, lost $432 million in Q1 2022 and its stock is down nearly 90% from its all-time high.
“There are companies that are fundamentally too far behind and it’s impractical to support them.”
Bankman-Fried also has an eye on crypto miners, many of whom have leveraged their balance sheets at breakneck speed to scale quickly and cash in on this 21st century digital gold rush. Shares of publicly traded crypto miners including Marathon Digital Holdings and Riot Blockchain have fallen more than 60% since the start of the year.
One crypto asset Bell Weather Bankman Fried isn’t worried about is Tether, the world’s largest dollar-pegged stablecoin with a market capitalization exceeding $70 billion. Many industry observers viewed it as a ticking time bomb with questionable safeguards whose failure would almost certainly pose an existential threat to the entire cryptocurrency market. Tested during Luna’s collapse, Tether briefly lost its peg at $1 and fell to a price of 95 cents. However, he successfully processed over $10 billion in withdrawals and has since recovered.
Says Bankman-Fried, “I think the really bearish views on Tether are wrong…I don’t think there’s any evidence to support them.”