Why crypto collapse matters
Contrary to popular belief, disintegration of FTX more than one man’s catastrophe
It will take time — and multiple federal inquiries — to fully understand what happened behind the scenes at FTX, a $32 billion Bahamas-based crypto exchange that vaporized overnight.
But here is the simplest explanation: FTX let people and companies buy and sell digital currencies, holding billions of dollars’ worth of customer deposits. FTX founder Sam Bankman-Fried also created an investment fund called Alameda Research that trades cryptocurrencies. The businesses were supposed to be separate, but this year, Alameda needed cash and apparently dipped into FTX’s customer deposits.
Then, this month, FTX customers became worried about their deposits and rushed to withdraw them, setting off a bank run and pushing FTX into bankruptcy.
The apparent commingling of funds is suspicious and could lead to criminal fraud charges and lawsuits. I want to explain why the disintegration of FTX matters — it’s more than simply one man’s financial catastrophe.
1. Crypto went mainstream in the pandemic. Regulation has yet to catch up.
Cryptocurrencies were part of overlapping investment manias — including meme stocks, trading cards, non-fungible tokens and sneakers — that got people chasing speculative investments over the past few years. But not everyone buying in understood the level of risk involved.
If a bank fails, the government might bail it out. But crypto is unregulated with few protections. Risky bets at several crypto projects once deemed valuable have led to “death spirals,” incinerating billions of dollars’ worth of investors’ money.
But FTX and Bankman-Fried stand out. He made hundreds of investments in smaller crypto projects and bailed out failing ones.
Evangelists for cryptocurrencies and their underlying technology promote them as investment vehicles that eliminate the need for faith in people and institutions. But Bankman-Fried made a point of fostering trust. Now he’s a pariah, and he brought all of the crypto industry under scrutiny.
2. FTX’s collapse is connected to the broader tech industry retreat.
FTX fell apart amid a broader pullback for the tech industry. Tech stocks have crashed. Venture capital funding is drying up. Nearly 800 tech companies have laid off over 120,000 workers this year.
The tough times in tech can be traced to interest rates for borrowing money. For more than a decade, rates were low, pushing investors to chase risk and pour money into high-growth tech companies. Now rates are rising. The rate increases have hurt tech company valuations and access to capital.
3. There’s more to come.
FTX’s bankruptcy filings list over 1 million creditors. In addition to people who used the platform to store their cryptocurrency investments and investors who backed the company, numerous funds and crypto startups had assets locked up there.
Investment managers that dabbled in crypto “should really be considering whether they should have relatively new, relatively unproven, relatively unregulated assets in their retirement plans,” said Marcia Wagner, founder of the Wagner Law Group, a firm focused on employee benefits.