Bankman-Fried needs a miracle to rescue FTX

Collapsed cryptocurrency exchange FTX was a magnet for the so-called smart money. Backers included the biggest names in finance and venture capital, from BlackRock Inc. to SoftBank Group Corp. to pension funds. Even after this summer’s crypto crash, Ontario Teachers Pension Plan described its investment in the firm as “lowest-risk” — because it was the venue where “everybody else” traded.
Now, with a shortfall of $8 billion to fill, nobody will touch FTX with a bargepole. Rival exchange Binance flirted briefly with a bailout and then walked away, arguing the uncertainty was too great. Sequoia Capital has marked the value of its $214 million stake down to zero. Assuming a value of $1 on Sam Bankman-Fried’s main businesses, as per Bloomberg News estimates, his billions have evaporated.
The fear is understandable, even if the prior greed of investors in the face of so many warning signs is not. The reality is that FTX was not a low-risk trading hub, but an offshore platform with conflicting business lines from operating its own token to offering leveraged trades. Reports allege blurred lines between FTX and a supposedly separate business, Alameda Research — now being wound down — involving transfers of FTX’s token FTT between the two; Dow Jones said FTX tapped into customer accounts to fund risky bets, citing a person familiar with the matter. The US Justice Department is investigating the exchange’s collapse, Bloomberg News reported.
But the other deterrent preventing anyone from riding to the rescue is the increasingly fragile-looking cryptocurrency market itself.
After all, even a multi-billion dollar hole can be filled if investors see value, points out corporate-governance expert Garen Markarian. During the darkest hours of the financial crisis, Goldman Sachs Group Inc. — a company that Bankman-Fried claimed to consider acquiring — received a $5 billion lifeline from Warren Buffett. Aside from the fact that FTX is no Goldman, the demand the exchange can expect for its products in the future looks to be in long-term decline.
Despite liberally spraying money at shameless promotions from sports stadiums to star athlete Tom Brady, FTX’s market share has fallen this year. Evaporating demand has cut the size of the crypto market from almost $3 trillion last year to below $1 trillion currently — making it little more than a sideshow compared with mainstream stock, bond and currency markets. The leverage in crypto is still being unwound: JPMorgan expects a cascade of margin calls to come and a Bitcoin low of $13,000.
At that price, one would imagine yet more losses in picks-and-shovels trades favored by institutions, such as cryptocurrency mining companies, some of which are going bust as profits from Bitcoin fall and electricity costs rise. So-called stable coins including Tether are being pressured as traders seek to exit virtual money for the real thing. Shares of rival exchange Coinbase Inc. have also been battered this year.
A bet on FTX is therefore not just a bet on the virtual assets under its hood but the future profits that could be expected from them. Buffett said earlier this year that he would not buy all the world’s Bitcoin for $25, because it would require finding the equivalent of a greater fool to sell it on to.
Crypto markets are offering a painful synthesis of the dotcom bust two decades ago and the financial crisis a decade ago. But some elements are new: There is no central bank to backstop the system, and nobody has any way of knowing what will turn out to be Google and what will end up being Pets.com.
—Bloomberg