[Financial Business World]FTX Exchange’s Bankruptcy Coin Circle Explodes “Lehman Moment” | Cryptocurrency | FTX Bankruptcy | Currency Circle Lehman Moment

[TheEpochTimesNovember192022]Everyone knows that cryptocurrencies have been very hot in the past few years, especially after the epidemic, the central banks of various countries have invested a lot of liquidity in order to save the market, which has caused a stir in the field of cryptocurrencies. In a rare speculative frenzy, Bitcoin once hit a historical peak of $69,000 at the high point last year, but this year, the cryptocurrency market has been shrouded in a cold winter, and it has continued to fall, making the total market value of global cryptocurrencies have increased from last year. The $3 trillion in November has shrunk to less than $1 trillion.

As early as half a year ago, LUNA coins and UST coins had collapsed, and a few days ago, the bankruptcy news of FTX, the world‘s second largest cryptocurrency exchange, became a bomb that triggered the “Lehman moment” in the currency circle. Moreover, The resulting market shocks will even spread beyond the currency circle. Many investors in the currency circle suddenly discovered that they seemed to be in a minefield. So, why is FTX suddenly bankrupt? Is it a “Ponzi scheme”? Is the carnival in the currency circle over? Where will the chaotic cryptocurrency business go? We’re going to talk about those today.

FTX suddenly went bankrupt and millions of investors lost their money?

FTX exchange, established in May 2019, is similar to cryptocurrency trading platforms such as Coinbase and Binance. It has been the top three cryptocurrency exchanges in the world before. FTX quickly became popular after its establishment, and its valuation exceeded US$1 billion one year later, and it soared to US$32 billion three years later.

The founder of the FTX exchange is Sam Bankman-Fried, born in 1992. Fried is a top student in the Department of Physics at the Massachusetts Institute of Technology (MIT), and his parents are law students at Stanford University. By.

In October this year, among the 400 richest people released by Forbes, the 30-year-old Fried also ranked 60th with a net worth of 22.5 billion US dollars, making him the richest young man under the age of 30 in the world.

The young and wealthy Fried is very high-profile in political donations and marketing. He once donated US$5.2 million to US President Biden in 2020, and is said to be the sixth largest political contributor. He also generously set up a political donation organization “Protect Our Future” (Protect Our Future), which is used to lobby candidates in the US midterm elections.

In addition, FTX also sponsors the NBA Miami Heat, Major League Baseball (MLB), Mesters AMG Formula One Racing Team (Mercedes-AMG Petronas F1 Team) and more. Such a lavish sale is of course a sign of sufficient funds, so the market also believes that FTX is rising rapidly.

However, no one expected that after entering November, within a few days, FTX filed for bankruptcy, which shocked countless people, and Fried himself was forced to resign. The source of FTX’s collapse was that FTX misappropriated $10 billion of customer funds to its sister hedge fund company “Alameda Research”.

On November 2, Coindesk, a well-known news media in the currency circle, reported that the balance sheet of “Alameda” showed that the fund had an excessively close relationship with FTX. The report shows that “Alameda” and FTT related assets are 5.8 billion US dollars, accounting for 88% of the net assets. As of June 30 this year, the total assets of “Alameda” totaled US$14.6 billion, including 3.7 billion unlocked FTT and 2 billion FTT collateral, and only US$130 million in cash; while the liability side included More than $7.4 billion in loans.

FTT is a token issued by FTX. Its market value once exceeded 100 billion U.S. dollars, and it has been sought after by hundreds of thousands of people overseas. “Alameda” is a cryptocurrency hedge fund company founded in 2017. Therefore, Coindesk’s report sparked speculation in the market that the fundamental purpose of Fried’s founding of FTX was to make it a “piggy bank” for Alameda.

A few days after the news came to light, Binance, FTX’s main competitor, publicly sold all the encrypted tokens related to FTX that it held, which led to a sharp drop in the price of FTT and a run on users. Subsequently, “Alameda” issued a repurchase offer to Binance, willing to repurchase all FTT held by Binance at a price of $22, but was rejected by Binance.

After that, the price of FTT plummeted all the way, from $22 to around $2.5. Within a week, the total market value shrank by more than 90%, which also triggered the decline of other cryptocurrencies such as Bitcoin and Ethereum. On November 8, FTX was forced to suspend all withdrawals.

On November 9, Binance founder Zhao Changpeng stated that Binance intends to acquire FTX, but soon after, Binance announced that it would abandon the acquisition, saying that the problems with FTX were beyond the scope of Binance’s control or assistance.

As a result, as soon as this news came out, it once again triggered market panic, and the disaster in the currency circle continued to spread. Bitcoin once fell below the $16,000 mark, and FTX plummeted by nearly 60%, falling to a low of $2.3.

Next, on November 10, “Alameda” went bankrupt, and on the following 11, FTX announced to file for bankruptcy, and Fried resigned.

Later, Reuters and the Wall Street Journal found that former FTX CEO Fried transferred $10 billion of customer funds from FTX to Alameda, and at least $1 billion of them disappeared out of thin air.

According to the “Wall Street Journal” disclosure, Fried was suspected of misappropriating client funds, triggering the involvement of the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to investigate the relationship between FTX and its sister companies “Alameda” and FTX US. relationship, and allegations of mishandling client funds.

Fried once said that FTX is “born for investors”. Under this purpose, he created a service that simplifies market mortgages, allowing users to store all margins in the same wallet. Last year, the price of cryptocurrencies hit new highs repeatedly, and FTX continued to launch various innovative products, including encrypted derivatives, options, tokenized stocks, leveraged tokens, etc., which contributed to the scale of market leverage.

Now, FTX, the world‘s second largest cryptocurrency exchange, has suddenly declared bankruptcy, making it impossible for all users to get back the virtual currency deposited on the platform. It is said that FTX has about 1.2 million users worldwide.

Taiwanese media reported that there were estimated to be as many as 500,000 to 600,000 victims in Taiwan, with losses ranging from US$3,000 to US$5,000 per person. There were also investors who formed a self-rescue group of more than 6,000 people.

“One Ping News Network” also reported the story of Mr. X, a big victim in the currency circle. As an engineer, Mr. X spent nearly 90% of his net worth and more than 2.4 million US dollars in FTX. He showed the APP screenshots of two of the sub-accounts, which are 1.91 million US dollars and 160,000 US dollars, and there are other sub-accounts. But “it was too late to take a screenshot, and the website was closed.”

Mr. X said that FTX once donated 40 million U.S. dollars to the Democratic Party of the United States and more than 20 million U.S. dollars to the Republican Party as political donations. It also recently acquired two bankrupt cryptocurrency companies, which shows that FTX has sufficient funds, and FTX is also The exchange with the most licenses in the United States, however, no one expected that there would be a day when it would suddenly go bankrupt.

The bankruptcy of the cryptocurrency exchange FTX has not only caused investors to scramble to withdraw funds from other platforms, but also brought a series of industry chain reactions.

On November 17, the digital asset brokerage company Genesis claimed that the company encountered “abnormal withdrawal requests” after the bankruptcy of FTX, and would suspend redemption and new loan issuance; Immediately afterwards, the cryptocurrency exchange Gemini also announced that it would suspend the redemption of its High-yield products for retail investors; in addition, BlockFi, a cryptocurrency lender, has also begun preparing for bankruptcy protection.

Just in January of this year, three funds, including the Softbank Vision Fund, invested $400 million at a valuation of $32 billion for FTX. However, on November 9, Sequoia Capital issued an email stating that the company had written down the value of its FTX investment to zero. In addition to Sequoia Capital, there are also BlackRock, Tiger Global, SoftBank Group, and the Ontario Teachers’ Pension Fund, which has been ranked among the top five pension funds in Canada all year round. They have all invested in FTX, and this time they may also suffer losses together.

How should the government supervise the continuous explosion of the currency circle?

In May of this year, UST, the world‘s third largest stablecoin, and its sister currency LUNA, which supported UST, experienced an avalanche-style plunge in just a few days, and the market fell into a “death spiral” panic, resulting in a market value of 400 The LUNA coins worth US$18.6 billion and the UST coins worth US$18.6 billion both returned to zero, which not only triggered a collective plunge in cryptocurrencies, but also led to the bankruptcy of many cryptocurrency companies. According to statistics, more than 160,000 retail investors around the world have liquidated their positions, with a total amount of 2.12 billion yuan, and many investors lost their money.

Since then, more than a trillion dollars have been wiped off the market value of cryptocurrencies around the world. However, just half a year later, the world‘s second largest cryptocurrency exchange has declared bankruptcy, which also shows the huge risks of investing in cryptocurrencies.

First of all, cryptocurrencies are very unstable, and changes in market sentiment may cause prices to rise and fall sharply. Second, they are prone to errors and hacks, and there is no perfect way to protect against technical glitches, human errors, or hacks. Third, the biggest risk of cryptocurrency is that it is currently not regulated by governments and central banks.

We have seen that the continuous explosion in the currency circle and the bankruptcy of FTX not only dealt a heavy blow to investor sentiment, but also highlighted the need to strengthen the supervision of the cryptocurrency industry. For example, some investors mentioned that their assets “evaporated in a second”, and complained that “the government has no supervision”.

However, since the cryptocurrency exchange is not a banking system, the protection of retail bank accounts in various countries cannot be applied, and the funds and cryptocurrencies entrusted by retail investors on the exchange are not protected by the state.

Moreover, as the International Monetary Fund (IMF) pointed out in a September report, the regulation of encrypted assets, whether it is to apply the existing regulatory framework or develop a new regulatory framework for it, is challenging. sexual.

For example, cryptoassets are essentially just codes that are stored and accessed electronically. They are not necessarily backed by physical or financial collateral. Nor are they necessarily stable by pegging to fiat currencies or other prices or things of value.

Additionally, it can be difficult for regulators to closely monitor the activity of cryptoassets with thousands of participants not subject to typical disclosure or reporting requirements.

Also, many functions in the financial system, such as leverage and liquidity provision, lending activities, value storage, etc., have now been replicated in the world of encrypted assets.

Moreover, there are a wide range of participants in the field of encrypted assets, including miners, verifiers, protocol developers, etc., which means that traditional financial regulation is not easy to cover them.

At the same time, cryptocurrencies also involve multiple regulatory departments including banking, commodities, securities, and payment, which fundamentally have different regulatory frameworks and goals.

The report also mentioned that, in fact, governments and international regulators did not stand idly by. For example, Japan and Switzerland have revised or introduced new regulations covering encrypted assets and their service providers, and the European Union, the United Arab Emirates, the United Kingdom and the United States are in the drafting stage of regulations. Overall, however, the resulting fragmented global response has failed to ensure a level playing field as countries have adopted vastly different approaches to crypto-asset regulation.

This brings up another question, which is, why do cryptocurrencies need regulation?

As you all know, Bitcoin was born in 2009 against the background of distrust of the financial management department that led to the Lehman crisis. It believed that the governance of the central bank could not be trusted, and the financial system should be handed over to the blockchain (distributed ledger).

In other words, “decentralization” is the biggest benefit claimed by cryptocurrencies such as Bitcoin. It can be free from government control and is the ideal society of libertarians. So, if the government is allowed to intervene in supervision now, wouldn’t it run counter to the original intention of the creation of cryptocurrency?

In fact, since the advent of cryptocurrency, it has attracted more and more capital investment, making it more and more connected with the “centralized” financial market. Moreover, a number of studies have shown that Bitcoin trends are highly positively correlated with the S&P 500 Index.

Not only that, Warren Buffett, “Doctor Doom” Roubini, Nobel Prize winner Paul Krugman, and central bank presidents of various countries are all questioning the actual function of Bitcoin.

At the Davos Forum on May 23, International Monetary Fund (IMF) President Georgieva (Kristalina Georgieva) said that Bitcoin may be called a coin, but it is not money, it is not a stable currency. Stores of value, some cryptocurrencies are more akin to Ponzi schemes of the digital age because they are not backed by physical assets.

So, why are there so many people chasing after something of no value? The reason is nothing more than the need for speculation.

We analyzed in a program in May last year that Bitcoin has no intrinsic value. Investors are crazy because they are attracted by the price. At the end of the program at that time, we also used the “Big Stupid Theory” to remind Everyone, don’t be the last fool.

Now, this analysis has also been confirmed by the November 14 report of the Bank for International Settlements (BIS).

The report mentioned that 40% of new cryptocurrency investors are men under the age of 35. These people invest in cryptocurrency not because of ideals such as “decentralized” finance or getting rid of big banks, but because of rising prices. investment, but three quarters of them ended up losing money. To make matters worse, investors who hold a large amount of Bitcoin will sell during the price increase period, and all the small investors who flood the market become fodder for these people, making early investors and insiders rich . Therefore, the price behavior of cryptocurrencies also fully reflects the greed and fear of human nature.

In fact, after so many years of development, cryptocurrency has become more and more like a “Ponzi scheme”, but those who play this “Ponzi scheme” are all high-tech professionals.

Institute of Finance, Commerce and Economics
Planning: Yu Wenming
Written by: Li Songyun
Editors: Wei Ran, Yu Wenming
Cantonese Dubbing: Ada
Edit: Quge
Producer: Li Songyun
Follow “Financial Business World“: https://bit.ly/GJEconUND

Editor in charge: Lian Shuhua