Crypto is not too big to fail, even with the help of FTX
“Turtles all the way down” is a practical phrase to describe how the human mind creatively fills gaps of logic. It allegedly stems from a person’s attempt to justify to the philosopher Bertrand Russell his belief that the world floated on a giant turtle by imagining another turtle beneath it, and then another, to infinity.
The picture fits the world of cryptocurrencies, where a recent fall in the prices of Bitcoin, Ether and other tokens has revealed a complex chain of stable coins, lending platforms and trading companies that are exploding at the same time. What was once a vicious circle of locked-in tokens that yielded interest that would be reinvested indefinitely is now a vicious circle, as margin calls and liquidations take place at an algorithmic rate. Each turtle appears to hide another.
The next phase includes bailouts, as the major players at the top of the crypto-speculation ecosystem – billionaire-run exchanges – step in to try to stem the tide of panic and restore confidence. Sam Bankman-Fried, co-founder of FTX Trading Ltd., has extended a $ 250 million credit limit to the lending platform BlockFi Inc. He has provided an additional $ 200 million in credit and a separate 15,000-Bitcoin revolving facility available to Voyager Digital Ltd. a Toronto-based crypto-broker who has owed $ 660 million from a troubled digital assets hedge fund Three Arrows Capital Ltd. And Changpeng Zhao, the head of rival digital exchange Binance, spoke of a “responsibility” to help crypto companies struggling to effectively compensate victims of the crypto game Axie Infinity’s hack earlier this year.
Fans say that this gives a credible backstop to a market of 1 trillion dollars. “Bankman-Fried is the new John Pierpoint Morgan,” says Anthony Scaramucci, citing the 1907 banking crisis that saw Morgan and his peers promise their own money to stop a loss of faith in the financial system. Others have compared it to Warren Buffett’s support for Goldman Sachs Group Inc. in 2008.
But remove the hype, and it still looks like turtles all the way down. Crypto is not too big to fail.
Bankman-Fried clearly has deep pockets, but his fortune is almost exclusively tied up in crypto: Bloomberg data estimates that $ 6.6 billion comes from his stake in Bahamas-based FTX, $ 2.1 billion from FTX’s separate US-based subsidiary, $ 1 billion from the trading company Alameda and $ 420 million from his newly acquired stake in the trading app Robinhood Markets Inc.
It makes sense that he either wants to make good purchases among the ruins, or make a public demonstration of faith in the future; somewhere along the line his own fortune is at stake. If FTX has also spent hundreds of millions of dollars on sports sponsorship, such as the FTX Arena in Miami, it’s a sign that it’s dependent on basic speculative demand to keep the crypto party going – just like its distressed peers do.
Nevertheless, this does not represent an external stamp of approval or introduce the type of systemic fire breach as an actual intervention by JPMorgan Chase & Co. or Berkshire Hathaway Inc. may.
At the end of last year, BlockFi had around $ 10 billion in interest-paying assets; The $ 250 million that Bankman-Fried has advanced represents just over 2% of this figure. Despite BlockFi’s comments to Bloomberg News that this is a “large number” that “strengthens” the balance sheet, it sounds more like a company adding debt because it needs cash. BlockFi says that after a “cash flow-positive” month in May, it got an “upturn” of pressure.
And although FTX’s revenue of $ 1 billion a year carries a lot of weight in crypto countries, in terms of credit and counterparty risk, this exchange is nothing like a regulated Wall Street firm.
FTX is headquartered in the Bahamas because, as the New York Times puts it, 80% of its revenue comes from a trading instrument that is still illegal in the state. Despite the turnover, it is only ranked as No. 22 on the computer company Kaiko’s grading of exchanges based on calculations including risk controls, security and data quality. And Bank Lev-Fred’s memorable explanation of return farming in April sounded to Matt Levine like a “Ponzi scheme.” Is this really Wall Street’s new face?
This is not to suggest that Bankman-Fried is not a smart investor; he has clearly managed to devise successful trading strategies and find worthwhile bets, such as his scornful mockery on Twitter that he would buy Solana for $ 3 per token (it has more than doubled since then).
But comparing FTX with JPMorgan, or Warren Buffett, or even the Federal Reserve – whose creation was spurred on by the market panic of 1907 – is wrong, and cross-border irresponsible. There is nothing on display here that would stop Bitcoin from falling further, and nothing that suggests that FTX and others would be immune to the fallout. Martin Finnegan, a partner in the law firm Punter Southall who has warned about the risk to institutional investors from offshore crypto-trading platforms, says that FTX’s actions look like a “fix.”
Bloomberg
