Air? Nothing but air. Well, maybe a drop or two of Fairy Dust. As Andy Kessler reminds his readers in the WSJ, air doesn’t hold up much. Likewise Fairy Dust.
FTX’s original sin was to borrow against its own FTT token.
Most of (the) platforms are now frozen and might disappear as customers caught with a hot potato frantically demand withdrawals in the wake of the FTX collapse.
But, as Kessler marvels, where were the questions? Who asked, what’s up?
Astonishing? No one asked?
Two Easy Questions:
- What is the underlying collateral?
- What are the assets?
Neither question would have had a comforting answer. Still, Mr. Kessler notes, no one asked.
Crypto’s Mass Delusion
FTX and Alameda empires “misappropriated” funds (a nice way to put it, understates Kessler).
And yes, withdrawals that acted like a bank run drove the company into Chapter 11.
The Fatal Conceit: Sam Coins vs. Scam Coins
FTX could set any price. But not forever, cautions Mr. Kessler:
FTT was so thinly traded that FTX could set any price ….
FTX and Alameda borrowed against tokens they themselves were manipulating, including Solana and others, which some called Sam Coins, now Scam Coins.
The fatal conceit: They thought FTT would stay high forever, so they invested in often illiquid positions. FTX was even paying employees, vendors and whoever else would take it in FTT tokens, whose total market cap used to be almost $10 billion and is now about $400 million.
Does reality eventually replace illusion? Well, in this case, reality eventually replaced illusion, but according to Andy K., a pinprick took down a bunch of stuff.
After Coindesk leaked a copy of Alameda’s balance sheet loaded with FTT tokens, Binance CEO Changpeng Zhao started selling. FTT went from $22 to under $3 in 48 hours. So much for collateral. When the smoke clears, FTX/Alameda may have $8 billion to $15 billion in debt outstanding, with little to sell for repayment.
It will take years to sort out who gets what.
Cottage industry firms jumped in to lever up crypto, and that’s when things turned dicey. They helped magnify toxicity by luring in customers by paying interest on their crypto holdings. But, one wonders, how could anyone pay interest on crypto?
By turning around and lending it out to hedge funds and others who also used leverage.
Insanity, Mr. Kessler reminds readers.
Most of these platforms are now frozen and might disappear as customers caught with a hot potato frantically demand withdrawals in the wake of the FTX collapse.
Of course, all these crypto lenders had to do was ask.
The hard questions:
- What’s the underlying collateral?
- Where are the assets?
With no good answer, Kessler reiterates, “no sane lender would have lent against it.”
But no one asked.
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