Part III- The FTX Pandora’s Box
Have you heard of the Pandora’s Box story? Well, it’s an interesting one but for now let’s focus on what opened the FTX Pandora’s Box.
Throughout the Crypto Winter (a severe bear market) that began in November 2021, Samuel continued his media spends to give the world the illusion of the power and might of FTX. He even gave interviews about how sensible he was in his spending (hiring prudently and so on). He even came as the knight in shining armour for many crypto companies that were going under. He testified in front of Congress, posed for every possible media outlet and kept announcing bail outs of companies. The media started calling him the J P Morgan of Crypto.
Why J P Morgan?
Because in 1907, a financial crisis was triggered by a frenzy of withdrawals caused by public distrust of the banking system (thanks to a series of bad banking decisions). John Pierpont Morgan and other wealthy bankers lent their own funds to save the US from a severe financial crisis.
So here was Samuel branding himself as the J P Morgan of the Crypto world. He went on giving interviews and making announcements on why he needed to save the Crypto industry. However, all of this was a front to hide the real problems (aka screw ups and fraud) at FTX. Samuel himself proudly admitted this to a journalist a few weeks back (when he was no longer a part of FTX). He even told this journalist that his talk about regulations was just PR too. His talk on ethics. You guessed it – PR.
And it’s not surprising that many venture capitalists love this kind of PR and bullshit. I will share a crazy perspective on venture investing by one of the biggest venture capitalists in the world. And mind you this one will blow your mind too. Sorry, I digressed a bit, but back to the post now.
So how does this all start going southwards?
We have to thank another gentleman Changpeng Zhao (CZ), Founder & CEO of Binance, for this feat.
By the way, up until this time, Binance and FTX are 2 of the top centralized crypto exchanges. Last year, they made around 30% of all trading volume on the exchanges. for trillions of dollars. In short, they were rivals. But this wasn’t always the case. In fact, Binance was an early strategic investor in FTX (in 2019). Binance helped FTX and FTX helped Binance. Then in 2021, FTX bought back Binance’s remaining shares in the company. For this, they received approximately $2.1 billion. A lot of this was paid in FTX’s magic money FTT. Since then, CZ and Samuel have become fierce competitors taking shots at each other.
As we all know crypto regulations have been at the centre of many heated debates and fights. Recently Samuel questioned CZ’s citizenship and took at pot shot at him.
In the first week of November, there was an incriminating revelation from Coindesk that a large majority of Alameda’s assets were in FTX’s own magic money $FTT and Solana’s ecosystem tokens. @jonwu.eth wrote on his twitter account that $FTT had very low circulating liquidity relative to Alameda and FTX’s holdings. In other words: even if Alameda wanted to sell the $5.8 Billion of $FTT it had, there wouldn’t be enough buyers.”
The low liquidity meant that the only thing that could make $FTT go down is if there were some huge $FTT sale.
And CZ got his chance to take Samuel and FTX down.
As mentioned above, Binance had received roughly $2.1 billion USD equivalent in cash (BUSD – stablecoin and $FTT)). CZ wrote on Twitter, “Due to the recent revelations that have come to light, we have decided to liquidate any remaining $FTT on our books. We will try to do so in a way that minimizes market impact. Due to market conditions and limited liquidity, we expect this will take a few months to complete. Binance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in its nascency and every time a project publicly fails, it hurts every user and every platform. We typically hold tokens for the long term. And we have held on to this token for this long. We stay transparent with our actions.”
By the way, the long term here for CZ seems to be 1 year +.
Binance would be selling 23 million FTT tokens, worth over $500 million at the time. This was huge.
As soon as CZ made the announcement, the Forbes 30 under 30 CEO of Alameda, Caroline Ellison (nothing to do with Larry Ellison) then offered to purchase $FTT for $22 to reduce price impact. She wrote “@cz_binance if you are looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22.
There was no real logic to this move as she could have bought at any price lower. But the frauds were still playing their game – trying to once again continue with their bullshit that everything was going great at Alameda and FTX.
On the other hand, there was a surprising response by CZ. He politely declined even though he could have sold $FTT at a much higher price. It was clear. CZ wanted to sink FTT and with it, Alameda and FTX. CZ soon announced that Binance had signed a letter of intent to fully acquire FTX, pending due diligence. A day later, he scrapped the deal and FTX was left with a $8 billion shortfall.
Soon FTX filed its petition for Chapter 11 bankruptcy. Well, you obviously know this.
The abrupt reversal of fortune for Samuel and FTX reveals how quickly empires can crumble in the volatile world of cryptocurrencies. The poster child of the Crypto game is now its biggest villain. At Least till we get the next one.