The FTX Collapse
The biggest story in crypto over the last month is once again a hard lesson in how opacity, centralization, and human greed lead to disastrous outcomes.
The series of events that culminated in the collapse of FTX started with a CoinDesk Report in early November. CoinDesk revealed that a large portion of the balance sheet at Alameda Research (FTX’s sister hedge fund) was made up of the FTX exchange’s token, FTT, with FTX and Alameda holding the vast majority.
That story kicked off a chain reaction of news and expose pieces on the two entities that revealed the real situation: FTX had lent huge amounts of customer funds to Alameda, which had gambled away the funds in various poor trading bets. Then more news came forth of outright fraud and insider trading. Alameda Research had special status as a user on FTX: a “secret exemption” from the platform’s liquidation and margin trading rules. Alameda was also allegedly front-running trades and token listings on FTX.
On November 12, Reuters released the stunning report that as much as $10 billion in user funds had been secretly funneled from FTX to Alameda. By end of November, FTX and related entities filed for bankruptcy. It is estimated that over 1 million customers were impacted by this bankruptcy.
This spectacular implosion has obviously impacted the crypto markets and shaken confidence in centralized exchanges.
At Mudra Capital, we believe that, as painful as the current set of events may be, they will be the final catalyst that will accelerate regulatory oversight and customer protections in the digital asset industry. Reputable mainstream financial institutions, as evidenced in the recent announcement from Goldman Sachs, are also treating these events as a call to action for reliable players to take more active role in the industry.
An important note for our investors: At Mudra Capital, we did not have any exposure to the FTT token in any of our funds. In addition, we migrated all assets out of FTX US earlier in the year and are not impacted by the closure of the FTX US exchange as part of FTX bankruptcy filings.
The uncertainty surrounding the FTX collapse and its potential for further contagion in the crypto market pushed Bitcoin prices to new two-year lows of around $15,500 on Nov. 22. Since then, despite further bad news such as crypto lender BlockFi filing for bankruptcy, the prices have mostly stabilized.
Bitcoin is now trading in a tight range around $17,000.
Ethereum has followed a similar pattern and is now trading in a tight range around $1,200.
At Mudra Capital, we believe that, while FTX news has overshadowed crypto markets in the short-term, there are also positive developments happening across the board, such as the softening of the Federal Reserve’s stance on interest rates, the legalization of crypto payments in Brazil, Latin America’s largest economy, and the launch of India’s CBDC pilot in 4 major cities.
Furthermore, we are convinced that the implosion of weak and fraudulent businesses over the course of 2022 (Terra Luna, Three Arrows Capital, FTX, Alameda, etc.) was a much-needed cleansing of opportunistic and greedy actors from the crypto market. These events have brought back the industry’s focus on building concrete and sustainable value for the coming years.
As we approach the holiday season, we would like to wish all our investors and newsletter readers a wonderful time of rest, relaxation, and family gatherings. We will be taking a break as well and will bring you latest news and fresh insights in the New Year with our next newsletter.