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Why The FTX Implosion Is Good For Bitcoin

FTX Collapse Sends Shockwaves Through the Cryptocurrency World

FTX, the recent collapse of one of the largest centralized cryptocurrency exchanges globally, has plunged the cryptocurrency world into chaos. However, for Bitcoin, this event, despite being potentially the worst black swan event in its history, isn’t unfamiliar, having survived multiple exchange collapses, extended bear markets, and stringent regulations.

FTX building in shambles

After experiencing a bank run, with reported withdrawals totaling $6 billion in just three days following widespread rumors and conspiracies about their financial situation, FTX encountered a liquidity crisis.

Consequently, they’ve collapsed, affecting numerous customers, projects, and investors, leading to an extremely precarious situation for the industry.

On November 16th, Sam Bankman-Fried (SBF) participated in an interview with Vox concerning allegations that FTX had lent money to its sister company, Alameda, which misused FTX customer funds and suffered losses.

When asked what he would change if given the chance, SBF wrote: “More cautious accounting and detaching Alameda from FTX once FTX could operate independently.”

SBF claimed that FTX didn’t directly “invest” customer deposits, attributing these investments to Alameda, although FTX Group owned Alameda Research.

He attributed the financial catastrophe to “disorganized accounting.”

“I didn’t fully grasp [the] magnitude until a few weeks ago,” he stated, explaining that the situation was more convoluted than merely lending out customer funds.

“Each step seemed rational and sensible in isolation, but when we finally totaled it last week, it wasn’t,” he wrote.

He insisted that he never intended to engage in unethical practices.

“I didn’t want to. Each individual decision seemed fine, and I only realized the collective impact at the end,” he added.

It appears to be a significant amount of denial.

FTX founder Sam Bankman Fried

FTX’s bankruptcy filing, resulting from misusing customer funds through gambling, has been described as “shocking.”

Mr. Ray, an attorney experienced in major bankruptcy cases like Enron’s, was highly critical of the executive team.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

“From compromised systems integrity and faulty regulatory oversight abroad to control being concentrated in the hands of an inexperienced, unsophisticated, and potentially compromised small group, this situation is unparalleled.”

It’s the retail investors and the cryptocurrency industry that are suffering the consequences.

The “Bitcoin is dead” rhetoric has resurfaced, with critics blaming the theft of funds by a centralized entity on the cryptocurrency stolen rather than the thief. Renowned author Chetan Bhagat wrote a detailed “crypto” obituary, comparing the cryptocurrency sector to communism that promised decentralization but resulted in authoritarianism.

The tweet and the subsequent article are available here:

Curiously, Chetan used a melting Bitcoin as the article’s image, rather than a melting FTT token or FTX building, which might be more appropriate considering Bitcoin has endured regulatory bans, the collapse of major exchanges like Mt. Gox, and over 466 reported obituaries since its inception in 2009 when it traded for just a few cents, as reported by CoinTelegraph.

FTX chart

This isn’t the first time a major centralized exchange has collapsed, causing a ripple effect across the industry. The most notorious collapse was Mt. Gox, a Tokyo-based cryptocurrency exchange that operated from 2010 to 2014 and was responsible for over 70% of Bitcoin transactions at its peak.

Due to its prominence, Mt. Gox became a prime target for hackers, suffering multiple significant security breaches over the years. In February 2014, they suspended withdrawals due to suspicious activities in digital wallets, ultimately discovering the loss of hundreds of thousands of Bitcoins, reportedly between 650,000 to 850,000.

This caused massive market instability, leading Mt. Gox to declare insolvency and eventually file for bankruptcy, ultimately liquidating in April 2014, somewhat resembling the current situation with FTX, albeit with variations.

The key takeaway here is the failure of a centralized entity, underscoring the decentralized and unique nature of Bitcoin, in stark contrast to FTX.

This was highlighted by the revelation that FTX potentially had no Bitcoin in custody.

On November 9th, FTX ceased all cryptocurrency withdrawals, including Bitcoin, raising concerns about their insufficient reserves to meet demands.
Further evidence emerged through their linked balance sheet, revealing that the exchange held zero BTC against its $1.4 billion in BTC liabilities, signifying FTX engaged in fractional-reserve Bitcoin trading.

“This is, on the one hand, problematic as it reveals the truth only when the exchange collapses, potentially resulting in loss of funds,” stated Jan Wüstenfeld, an independent market analyst.

He also noted, “On the other hand, this artificially inflates the bitcoin supply in the short run, suppressing the price and hindering actual price discovery […] Although these aren’t actual bitcoins, as long as exchanges issue fictitious paper, Bitcoin’s operational status is affected.”

Despite the ugly scenario, FTX’s minimal BTC exposure might decrease the likelihood of liquidating any remaining funds to enhance liquidity. Moreover, the recent surge in withdrawals, including $1.5 billion in BTC over the past week, likely into cold wallets, might lead to more users adopting self-custody and naturally holding onto their assets (HODLing).

Does this imply SBF was against Bitcoin?

Recent revelations indicate that Sam Bankman-Fried (SBF), FTX’s founder, was the second-largest Democratic donor after George Soros in the midterm elections, contributing nearly $45 million to lobby for crypto regulations allegedly favoring his firm.

According to CoinTelegraph, SBF aimed to impede Bitcoin’s growth through U.S. lawmakers and media by downplaying Bitcoin’s efficacy as a payment system.

Some commentators highlighted SBF’s ties to anti-crypto U.S. Senator Elizabeth Warren, noting his father’s involvement in assisting the senator in drafting tax legislation in 2016.

With SBF potentially facing criminal charges for illegally using customer funds for FTX trades, his influence among U.S. lawmakers has diminished significantly, an outcome that appears fitting.

Additionally, in the cryptocurrency market’s history, downturns often involved central players failing the ecosystem and altcoins becoming speculative ventures.

This was evident in FTX’s native token, FTT, as well as previously in Celsius Networks’ CEL and Terra’s LUNA.

Frequently operated by centralized entities, the supply of these coins becomes susceptible to manipulation, leading to vulnerability in cryptocurrency hedge funds, exemplified in cases like Three Arrows Capital and Alameda Research.

“The bubble in crypto this year emerged from tokens created purely for speculation,” observed BOOX Research, highlighting FTT and LUNA as examples of questionable cryptocurrencies.

Consequently, a cleansing of these altcoins, including FTT, that shouldn’t have existed may reinforce consumers’ and institutional investors’ trust in the cryptocurrency market, particularly Bitcoin.

According to CoinTelegraph, Bitcoin-based investment vehicles drew $18.8 million in the week ending Nov. 11, tallying year-to-date inflows of $316.50 million.

James Butterfill, CoinShares’ head of research, noted that “investors perceive this price weakness as an opportunity, distinguishing between ‘trusted’ third parties and an inherently trustless system,” following extreme price weakness due to the FTX/Alameda collapse.

Contrary to the 2018 bear market, BTC isn’t witnessing a demand collapse. The number of non-zero BTC addresses continues to rise, reaching a record high of 43.14 million as of November 2016.

Bitcoin addressess with a non zero balance chart

In stark contrast to 2018, where there was a substantial drop in non-zero Bitcoin addresses, traders today seem more mature, understanding the potential for Bitcoin’s long-term growth despite temporary downturns.

This perspective will likely become clearer once the FTX fallout removes the non-viable elements from the market.

Bitcoin forever!


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