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Why The FTX Implosion Is Good For Bitcoin

18 Nov 2022

Mitchell Nixon

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FTX Implosion: The Biggest Shock to Crypto Yet

The recent FTX implosion of one of the largest global centralised cryptocurrency exchanges, FTX, has sent the cryptocurrency world spiralling.

However, this is nothing new for Bitcoin, as despite this most likely being the worst black swan event in its infancy, it has survived multiple exchange implosions, deep bear markets and miscellaneous strict regulation.

FTX Implosion of building

After suffering a bank run, with a reported $6 billion of withdrawals in just three days after repeated conspiracies and rumours came to light about their financial position, FTX has faced a liquidity crunch.

As a result, they have gone under, taking a number of customers, consumers, projects and investors with them, creating a very dire situation for the industry.

On November 16th, Sam Bankman-Fried (SBF), did an interview with Vox regarding the notion that FTX had loaned money to Alameda, its sister company, who gambled with FTX customer funds and lost it. 

Asked what he would change if he could “do it all over again” SBF wrote: “More careful accounting and offboarding Alameda from FTX once FTX could live on its own.”

SBF claimed that FTX didn’t “invest” customer deposits because Alameda, not FTX, actually made the investments. He sidestepped the fact that his company FTX Group also owned Alameda Research.

SBF blamed “messy accounting” for the financial disaster.

“I didn’t realise [the] full size of it until a few weeks ago,” he wrote, saying it “was messier and more organic” than simply lending out customer funds.

“Each step was in isolation rational and reasonable, and then we finally added it up last week and it wasn’t,” he wrote.

He maintained that he “didn’t want to do sketchy stuff”.

“And I didn’t mean to. Each individual decision seemed fine and I didn’t realise how big their sum was until the end,” he wrote.

“It was never the intention” to get away with it, he stated, adding: “Sometimes life creeps up on you.”

A lot of denial it seems.

FTX Sam Bankman outside a galaxy

As a result of gambling customer funds, the contents of FTX’s bankruptcy filing have been described as “shocking”.

Mr Ray, a lawyer who has worked on major bankruptcy cases, including Enron’s, was scathing in his assessment of the executive team.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

And it’s the retail investors and cryptocurrency industry that have borne the brunt. 

How the FTX Implosion Highlights Bitcoin’s Resilience

The “Bitcoin is dead” community is back, resurrecting infamous critics that are back to blame a robbery of funds, by a centralised entity, on the currency that was stolen, as opposed to the thief. 

Per CoinTelegraph, Chetan Bhagat, a renowned author from India, wrote a detailed “crypto” obituary, comparing the cryptocurrency sector to communism that promised decentralisation but ended up with authoritarianism.

The tweet, and subsequent article, can be read below: 

As you can see, funnily enough Chetan has made a melting Bitcoin as the article image, rather than a melting FTT token, or FTX building as I have done. 

It would seem this would be more appropriate given that Bitcoin has over a decade of surviving regulatory bans, nationwide bans, the meltdown of huge exchanges such as Mt Gox. Per CoinTelegraph, this includes 466 obituaries since its debut in 2009 when it traded for merely a couple of cents.

As mentioned, this isn’t the first time a serious centralised exchange has gone under, dragging the rest of the industry with it. The most infamous collapse was Mt. Gox, which was a Tokyo-based cryptocurrency exchange that operated between 2010 and 2014. It was responsible for more than 70% of Bitcoin transactions at its peak.

Given how prominent Mt. Gox was, it was very susceptible as a main target for hackers, and thus experienced serious security breaches several times throughout its operational years. In February 2014 they eventually suspended withdrawals due to suspicious activity in digital wallets, discovering they had lost hundreds of thousands of Bitcoins, reportedly being between 650,000 to 850,000 odd. 

This causes huge instability in the market, as Mt. Gox was pushed into insolvency, and eventually filed for bankruptcy, liquidating in April 2014. Very similar to the FTX situation unfolding right now, albeit slightly different. 

The core thing to note here is that it is a centralised entity that is failing, which actually underlines why Bitcoin is so decentralised and special in nature, completely contrary to FTX.

This was actually made evident by the fact that FTX potentially had zero Bitcoin in custody.

On the 9th of November, FTX halted all withdrawals of cryptocurrencies, which included Bitcoin, raising alarms that they did not have sufficient reserves to meet the demand.

This was further evident through their linked balance sheet that identified that the exchange had zero BTC against its $1.4 billion in liabilities of BTC. This means FTX enabled fractional-reserve Bitcoin trading.

“This is, on the one hand, bad for you as you will only find out if they have been swimming naked once the exchange implodes, accompanied by you losing all your funds,” Jan Wüstenfeld, writes as an independent market analyst. 

He also stated, “on the other hand, this artificially increases the bitcoin supply in the short-run, suppressing the price and preventing actual price discovery […] Yes, I know these are not real bitcoin, but as long as the exchanges issuing fake paper, Bitcoin remains operational, the effect is there.”

Although an ugly situation, this means FTX’s limited exposure to BTC will reduce the likelihood of selling any remaining funds to restore and raise liquidity. Additionally, as so many people have withdrawn from exchanges in the last week, including $1.5 billion in BTC over the last week alone, most likely to cold wallets, this could spawn a new cohort of users practising self-custody and naturally HODLING. 

Does this mean SBF was anti-Bitcoin?

What’s now come to light in the last week is that the founder of FTX, Sam Bankman-Fried (SBF), was the Democrats’ second biggest donor after George Soros for the midterm elections, giving nearly $45 million to lobby for crypto regulations that would allegedly benefit his firm.

Per CoinTelegraph, SBF attempted to tarnish Bitcoin’s growth through the U.S. lawmakers,  as well as news articles, where he downplayed Bitcoin as an efficient payment system.

Other commentators have also pointed out a connection between SBF and anti-crypto U.S. Senator Elizabeth Warren, noting the former’s father, Joseph Bankman, helped the politician draft tax legislation in 2016.

SBF’s influence among U.S. lawmakers is now gone with him facing potential criminal charges for illegally using customer funds for FTX trades. This definitely seems appropriate. 

Additionally, over the cryptocurrency markets history, downturns have always had centralised players failing the ecosystem, as well as altcoins becoming money-grabs. 

This was clearly apparent in FTX’s native token, FTT, as well as earlier in the year Celsius Networks CEL, and Terra’s LUNA.

More often that not created and operated by centralised actors, the supply of these coins, and thus price, becomes vulnerable to manipulation. 

It is the exposure and more often than not, collateral, that ultimately drives cryptocurrency hedge funds to the brink, which was evident in Three Arrows Capital’s case, as well as Alaema Research. 

“In our view, the bubble in crypto that popped this year was in the atmosphere of tokens being created just for speculative purposes,” noted BOOX Research, adding:

“While we can debate which cryptos are ‘bad money driving out the good’, FTT and LUNA are just two examples everyone can agree should not have existed.”

Hence, a market cleansing of these altcoins, coins that should never have existed, including FTT, may further strengthen consumers and institutional investors confidence in the cryptocurrency market, particularly Bitcoin.

Per CoinTelegraph,  Bitcoin-based investment vehicles attracted $18.8 million to their coffers in the week ending Nov. 11, bringing its year-to-date inflows to $316.50 million.

“The inflows began later in the week on the back of extreme price weakness prompted by the FTX/Alameda collapse,” stated James Butterfill, head of research at CoinShares.

He also added that “it suggests that investors see this price weakness as an opportunity, differentiating between ‘trusted’ third parties and an inherently trustless system.”

What the FTX Collapse Means for the Future of Bitcoin

This would mean that compared to prior bear markets, particularly 2018, BTC is not experiencing a collapse in demand.

In fact, the number of non-zero BTC addresses has continued to grow, despite the strong downtrend in 2022, hitting a record high of 43.14 million as of November 2016. 

This was very different in 2018 that saw a huge drop in the number of non-zero Bitcoin addresses. This would suggest that traders have matured and understand that the grass is always greener on the other side in the long term with Bitcoin, knowing there is a price recovery.

This will become particularly apparent once the FTX domino effects clears out the dead wood. 

Conclusion:

The FTX implosion serves as a critical reminder of the risks inherent in centralised platforms and the importance of informed decision-making in cryptocurrency trading. While this event has shaken the market, it also underscores the resilience of Bitcoin and decentralised systems like DeFi, which remain pillars of the crypto ecosystem.

For traders and investors, leveraging tools like technical analysis and exploring opportunities in crypto mining hosting can provide a competitive edge in uncertain times. Understanding market trends and having a clear strategy are essential for navigating challenges and capitalising on opportunities.

Take charge of your financial future with expert guidance. Book a free consultation with Imperial Wealth today and gain actionable insights to enhance your trading skills, optimise your portfolio, and thrive in the dynamic world of cryptocurrency. Let us help you turn challenges into success!