The implosion of the FTX crypto exchange vaporized billions of dollars overnight.The disaster is being called crypto’s Lehman Brothers moment, but Lehman had more than $600 billion in real assets that were salvageable.FTX on the other hand has assets in illiquid cryptocurrencies that have little to no value. Loading Something is loading.
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The collapse of Sam Bankman-Fried’s FTX has vaporized billions of dollar in customer money and shaken the confidence of a market that was already in the throes of a long and brutal downturn.
As the dust settles and questions pile up, many are asking: what just happened, and how does a firm with billions in assets one day go completely belly-up the next?
There are some useful historical comparisons to turn to, but none of them paint a complete picture simply because crypto’s value is, by nature, derived purely from the speculative opinions of the traders and investors willing to buy and sell tokens. That’s it. There’s no underlying asset or cash flow backing it, no corporate profits that determine its price per unit, and no connection to anything underpinning the real economy.
For now though, it’s useful to at least consider the historical analogs to illustrate what is going on and how money can simply “disappear” in the crypto world.
A big difference between the implosion of FTX and the downfall of Lehman Brothers in 2008 is that Lehman Brothers had more than $600 billion in assets that, while partially illiquid at the time, were real assets and could be recovered.
In the aftermath of Lehman’s collapse, its 111,000 customers received the $106 billion they were owed, and secured creditors received full payouts. Even unsecured creditors recovered almost $10 billion, or 41 cents on the dollar of what they were owed.
Sure, Lehman Brothers equity investors were completely wiped out, as will be the investors in FTX, but that’s the risk equity investors assume when they buy in.
What can’t be said is whether FTX customers will be made whole on the billions of dollars that evaporated from accounts, in part driven by customer funds being used with leverage by FTX’s sister company Alameda Research to make up for losses sparked by trading illiquid tokens.
According to a report from the Financial Times, FTX held less than $1 billion in liquid assets against $9 billion in liabilities. Compare that to Lehman Brothers going bankrupt with $639 billion in assets against $613 billion in debts.
FTX’s balance sheet also declared the firm held $2.2 billion in a less-liquid asset called Serum. But the entire market value of Serum was just $65 million on Monday, suggesting any sale from FTX would be far less than what they’d claimed.
Similarly, a CoinDesk report that helped spark the downfall of FTX detailed that Alameda Research held billions of dollars of the FTT token on its balance sheet, even though the total market value of FTT at the time was less than what was on its balance sheet.
This speaks to the underlying nature of cryptocurrency: it’s a purely speculative asset with no underlying cash flows or real assets that can be salvageable in an event like bankruptcy.
When a company goes bankrupt, investors can sell property and capital equipment and monetize patents and licenses to make good on its outstanding debts. Not so much when all the company in question holds is illiquid tokens that are falling in value, buyers of which have become non-existent.
Instead, the price of crypto, similar to gold, is solely based on supply and demand dynamics of traders and investors.
And that’s why the collapse of FTX is so spectacular.
While it’s still too early to tell, the whole ordeal — featuring a toxic combination of leverage, speculative crypto tokens with no underlying real assets, and possible misuse of customer funds — appears likely to have wiped out at least $10 billion of funds from users who entrusted their money to the exchange.