Turmoil in the cryptocurrency market
The background of FTX and Alameda Research
The crypto journey of Sam Bankman-Fried, better known as SBF, began well over 5 years ago. In 2017, he founded Alameda Research, a trading firm focused on quantitative trading. This type of trading uses a trading strategy based on a large amount of data. In 2018, Alameda became very successful with arbitrage trading the price difference between Bitcoin in the U.S. and Japan. This quickly earned the company several million and later even billions. Because Bankman-Fried himself owns about 90 percent of Alameda Research's shares, his wealth grew rapidly. Over the past few years, Alameda has grown significantly and has expanded its ventures into numerous VC deals and investments.
In 2019, Bankman-Fried continued his journey by founding FTX.com, a centralized cryptocurrency exchange. In recent years, the exchange has grown tremendously, rising to a prominent place in the rankings based on volume, shortly after Binance. Although FTX and Alameda no longer have an official relationship on paper, the two still seem related and are often mentioned together in the same breath.
The start of the downfall
The turmoil began in early November when crypto news platform Coindesk claimed to have the balance sheet of Alameda Research in its hands. This balance sheet revealed that much of its assets consisted of the token FTT, the trading token of FTX. This was about $5.8 billion out of the total of $14.6 billion. The company owns such a large portion of FTT tokens that if they went into free circulation, it would triple the normal circulating amount. Thus, there would not be sufficient buyers if they wanted or needed to sell them. To be able to use the value of these tokens though, Alameda has taken out loans using FTT as collateral. This is not without risk, if the value of this token falls to a specific price, the company can expect a margin call where it needs to liquidate these assets in order to pay off debts. Therefore, due to the close relationship with FTX, this was reason enough for users to start selling their FTT tokens and withdraw liquidity from the trading platform.
On Sunday, Nov. 6, Changpeng Zao (CZ), the CEO of Binance, put fuel to the fire by announcing that Binance was going to sell its FTT. Binance was previously a major investor during the seed round of FTX, as a result, the company still owned around $500 million in FTT tokens last Sunday. The turmoil continued to grow and the price of FTT began to fall sharply. Not much later, the first users began to experience problems withdrawing their funds on FTX.com. On Tuesday all withdrawels were halted. This seems to create a scenario similar to the insolvency of Celcius earlier this year which had insufficient liquidity to disburse the funds back to its users. Currently, there is still a lot of uncertainty about this and therefore speculation is still mainly about how users' funds disappeared.
After the suspension of withdrawals, hours of radio silence followed until late Tuesday when Binance announced it had signed a letter of intent to acquire FTX.com. This caused some relief in the market, but we now know that this acquisition is off the table. After extensive research, Binance announced Wednesday night that it would not go through with the acquisition due to the poor condition of FTX.com.
The impact of the Hodl funds
The impact for Hodl funds is mainly in the general decline of the cryptocurrency market. As a result of the turmoil, confidence in the cryptocurrency market has taken a big hit in recent days. This resulted in sharp declines in prices across the spectrum. Bitcoin dropped from around $21K to $16K and several alt-coins lost several multi-digit percentages. Obviously, the biggest hits were in the area of the FTT token and related FTX investments. The FTT token fell as much as 92%! Hodl.nl investment funds do not use the FTX exchange and have not invested in the FTT token.
We would like to reiterate that the Hodl funds have a long-only strategy, are not leveraged in any way, do not use derivatives and never use their positions to serve as collateral. The Hodl funds use cold-storage facilities to store cryptocurrencies and try to avoid holding coins on exchanges as much as possible.
The future?
The biggest impact of the situation is on users of the FTX.com platform who currently cannot access their funds. The coming weeks should show exactly what will happen. The possible bankruptcy of an exchange of this caliber could be a perfect opportunity for the entrance of a player from the traditional financial world, such as Goldman Sachs or JP Morgan who could gain access to the more than 1 million users of the exchange FTX in one deal. The preceding book examination will be able to shed more light on this, for now, we will have to wait and watch this from day to day.
Although the turmoil has led to a drop in share prices, essentially nothing has changed about how cryptocurrencies work. In fact, it argues for the further need for decentralization, so it may be positive that the acquisition by Binance will not go through. We do expect that the restoration of confidence in the market may take some time, the barometer shows that there is currently a lot of fear in the market. History shows that these periods often turn out to be good times in hindsight to invest correctly, as Warren Buffet says, "Be greedy when others are fearful and fearful when others are greedy!"
