What if crypto just...dies?

The fall of FTX means more than just one insolvent exchange.

"Sam Bankman-Fried" by Cointelegraph is licensed under CC BY 3.0.

I was going to get up and write about the election today, but the Democrats did so unexpectedly well that control of both the House and the Senate is still uncertain. So I think I’ll write a post about the other big thing that just happened — the sudden implosion of FTX.

For those who are unaware, FTX is one of the main cryptocurrency exchanges. It’s located offshore, though it also owns a much smaller U.S. exchange called FTX.US. The founder and CEO of FTX is Sam Bankman-Fried, known as SBF, who also runs a trading firm called Alameda Research. Together, Alameda and FTX allowed SBF to amass an enormous $16B fortune, which he promptly set about donating to various “effective altruism” causes (and to politicians). In the last year or two, SBF had more or less become the face of crypto, staring out from giant billboard ads in the downtowns of major cities.

In the last few days this all came crashing down in dramatic fashion. Coindesk, a crypto news site, discovered that Alameda was holding quite a lot of tokens created by FTX, and had borrowed huge amounts of money — presumably using the tokens as collateral. Hearing about this, FTX’s main rival, Binance, dumped its holdings of FTX’s tokens. Their price crashed, rendering Alameda abruptly insolvent, which in turn rendered FTX itself insolvent. In an ironic twist, SBF was forced to turn to Binance itself for a bailout:

SBF @SBF_FTX

1) Hey all: I have a few announcements to make. Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc.).

The deal is not finalized, though, and will presumably not include a bailout for Alameda. Much of SBF’s awesome fortune — 94%, according to Bloomberg’s estimate — has thus simply vaporized. (Remember that a lot of wealth is notional, and can just disappear into thin air. This is especially easy in crypto, where there are fewer buyers and sellers.) And there’s a good chance FTX will end up toast.

(Update: Binance now says it’s walking away from the FTX bailout. Bankman-Fried is saying that FTX will go bankrupt without an infusion of billions of dollars of capital. So, it's not looking good for FTX.)

(Second Update: FTX has now filed for bankrutpcy, and Bankman-Fried has stepped down as CEO. Bloomberg estimates that his entire personal fortune has now been wiped out.)

Now, there’s no reason the fall of one single exchange, or one single rich guy, has to be apocalyptic for the crypto space as a whole. There are still plenty of places you can easily trade crypto (Coinbase, Binance), and the whole ecosystem is probably less leveraged than it was when Terra and Luna crashed earlier this year. And yet friends who work in crypto tell me that people in the industry are more pessimistic than they’ve ever seen them. Some on Twitter wondered if this was the beginning of the end for crypto itself.

That’s almost certainly overdone — you can’t really kill crypto, given its decentralized nature, and lots of people will still work on it. But I think the pessimists are right to be pessimistic, because the way that FTX fell suggests that crypto simply hasn’t been able to overcome some of its central weaknesses.

FTX’s fall shows crypto may never truly go mainstream