November 9, 2022 | Issue 41 – BREAKING NEWS! CRYPTO'S LEHMAN BROTHERS MOMENT? As the US focused on elections and which party will control Congress, the crypto world experienced a major shock. FTX and Alameda Research, led by the dynamic 30-year old billionaire CEO Sam Bankman-Fried, signed a Letter of Intent with Binance, agreeing to be acquired. What? Why? What does this mean for crypto? Is this why crypto prices are plummeting? I wanted to share this major crypto news with you as soon as possible instead of waiting until Sunday. Also, I will be unplugged for the rest of the week and through the weekend to celebrate my daughter's wedding. Keep an eye on the crypto news over the next week. There will be a lot of crypto stories as soon as election news quiets down. If you want to see past issues of my crypto newsletter, go Crypto News for Realtors. Also, check out my YouTube videos and Podcast Crypto News for Realtors wherever you get your podcasts. Have a productive week and stay crypto curious! Rich Hopen firstname.lastname@example.org | 908.917.7926 PS. This newsletter is supported by home buyers and sellers in NJ who retain me as their real estate agent. If you know of anyone looking to buy or sell a home, please reach out to me.
CRYPTO NEWS – BREAKING NEWS ▸ #1 CRYPTO EXCHANGE BINANCE RESCUES #2 FTX FROM COLLAPSE On Tuesday, Binance agreed to buy FTX and Alameda Research after FTX experienced a fatal "liquidity event." This occurred after a multi-day public spat on Twitter between Sam Bankman-Fried ("SBF"), founder of crypto trading firm Alameda Research and FTX, and Changpeng Zhao ("CZ"), founder of Binance. The tweets started on Sunday in response to a report from CoinDesk which revealed that Alameda's balance sheet relied upon FTT, FTX's token. The market cap of FTT was $3 B, but it was illiquid. Large selling orders of FTT would cause a cascading drop in price that could damage FTX. CZ announced on Twitter that Binance would liquidate its FTT holdings, worth about $580M as of Sunday. CZ and SBF have a history of publicly disagreeing how to handle regulators. SBF regularly visits DC and wants to help shape the dialogue among industry leaders, legislators, and regulators. CZ, by contrast, is less visible in DC. CZ compared FTX risk with the Luna cryptocurrency that collapsed earlier in 2022. The drama that began on Sunday, ended Tuesday when CZ and SBF announced that Binance would acquire FTX.com. They tweeted: "To protect users, we signed a non-binding LOI [letter of Intent], intending to fully acquire FTX.com and help cover the liquidity crunch." SBF added, "A huge thank you to CZ, Binance, and all of our supporters. Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in.”
Until this incident, SBF's companies were viewed as crypto's savior when they bailed out firms on the brink of collapse like BlockFi and Voyager Digital.
▸ SBF... WHAT HAPPENED? Bloomberg Opinion columnist Matt Levine, explained, "A crypto exchange is a weird sort of business, in many ways more like a brokerage than a traditional exchange. The simplest way to run the business is to take deposits from customers, buy crypto for the customers, keep everything segregated, and make money on commissions." A friend who works at US crypto exchange explained, "I view this as a failure of Alameda Research, which is inextricably linked to FTX, which caused a bank run that necessitated a rescue. The thing that kicked this off was Alameda held a ton of FTT and Solana, which are not liquid, and then to make matters worse they borrowed USD using their FTT and SOL as collateral. When FTT and SOL fell apart, Alameda fell apart. This caused a bank run on FTX, causing Binance to be able to scoop them up."
▸ MESSAGE FROM THE VICTOR
CZ said that the lessons learned from FTX's forced sale to Binance: ● Never use a token you created as collateral. ● Don’t borrow if you run a crypto business. ● Don't use capital 'efficiently.' Have a large reserve."
Jeremy Allaire, co-founder and CEO of Circle, said this was crypto's Lehman Brothers moment. Allaire used FTX's crisis as an opportunity to highlight the financial stability of its stablecoin, USDC, which is backed by US treasury bonds and cash. US Senator Cynthia Lummis, R-WY, said that her crypto bill that was co-sponsored by Sen Kirsten Gillibrand, D-NY, provides essential regulation "ensuring customers are protected while still promoting responsible innovation."
Shaan Puri explained what happened in a tweet thread that recites the key moments (Think... slow motion analyses of a horrible car crash.) ‣ "Here's the 30 second summary of the FTX drama that is blowing up in crypto.
‣ 1/ How FTX (a multi billion dollar co) almost died overnight ‣ 2/ And why this is a god tier strategic move by Binance. OK so it starts years ago. Binance was an early investor in FTX. ‣ But FTX starts growing like crazy. They become the #2 biggest exchange. ‣ Steph curry, tom brady, they cut huge marketing deals. ‣ SBF becomes the famous "fro of crypto." ‣ They started as friends, now competitors. Binance #1. FTX #2. (coinbase and others are smaller) ‣ Binance decides to sell it's stake in FTX. As part of the buyout, they agreed to take $2B of it in "FTT" -- a token that FTX created that it uses for trading fees. ‣ So now - Binance and FTX are friendly competitors. ‣ Binance owns a sh*t ton of FTT ($2B). There's not a lot of FTT trading volume (this is important soon). ‣ Two days ago, CZ comes out and says SBF has been talking sh*t about them to regulators lobbying in a way that would hurt binance. So he announces publicly on twitter to his 7M followers that he's going to DUMP his entire $2B FTT stash. ‣ Anyone holding FTT knows this is bad news. $2B of sell pressure would crush price, so they start to panic sell. ‣ Price of FTT drops like 15-20% overnight. ‣ Nobody wants to buy FTT (too risky, a whale is about to dump) and everyone wants to sell. Numbers go down. ‣ Enter Alameda - the hedge fund/market maker Sam started before FTX. ‣ They are kings. But news leaks showing the emperor has no clothes. They have ~$12B in assets, $7b ish in liabilities...but half their "assets" are in FTT token which is plummeting & illiquid. ‣ Alameda might die. ‣ If Alameda is in trouble, FTX might be too. They are sorta sister companies. Market makers on FTX. And possibly hold/trade customer deposits. The relationship has been unclear for years. (achilles heel?) ‣ But most people think of FTX as a blue chip company. Sam is famous. He's a genius right? ‣ They wait for him or Alameda to show they are in good health. *narrator* but they were not in good health. ‣ Sam tweets saying everything is "fine" but it feels to all of crypto like a girlfriend saying "I'm fine" but she's not fine. ‣ Alameda's CEO comes out and says they will "happily" buy the FTT token as it plunges. But something tells us that it's not so happy, even with the exclamation mark. ‣ 24 hours pass. If they had the financial strength, they would have shown it by now. ‣ This starts to feel like the "steady lads" moment right before luna collapsed. ‣ People freak out, start withdrawing funds from FTX. Ya know, just in case it collapses like celsius, blockfi, voyager, luna all did in the past year ‣ $1B+ of withdrawals. FTX is facing a liquidity crunch. ‣ More silence (wtf), withdrawals paused on FTX (double wtf). ‣ Then today - @SBF_FTX comes out and says they are entering a "strategic transaction" with binance strategic transaction? ‣ CZ clears it up "FTX was in trouble. We bought them to save them." ‣ Binance basically started a rumor, made a threat, and ended up buying its biggest competitor overnight. ‣ For now the drama ends, crypto crisis averted. ‣ If FTX failed...that would have been devastating for all of crypto. ‣ Sam had become the main character. you never want to be the main character."
CRYPTO CLASS – Crypto Industry Invests in Candidates In Paul Kiernan's WSJ article about crypto dollars flowing to 2022 election candidates, Kiernan reports that over $73 M was spent compared to $13 M in 2020. This year, the industry also spent $15 M on lobbying through September. The industry is being scrutinized by regulators like the SEC who argue that much of the crypto industry is skirting investor protection laws. Kiernan reported that there have been over 100 enforcement actions against crypto entities and the SEC has doubled the size of its crypto department. Industry leaders recognize that reasonable regulations are necessary for crypto to become widely accepted. Unlike most legislative matters, crypto enjoys support from both political parties. “These midterms are the most important elections for this crypto community,” said Hermine Wong, a policy director at Coinbase, the largest U.S. crypto-trading platform. “We believe that the legislators who will be coming in this cycle will be able to finally draft legislation to govern this space.” Crypto contributions exceed political contributions from the auto and defensive industries combined. The industry is urging its favored members of Congress to support legislations that provides regulatory protection to investors without being overly burdensome.
INFLUENCERS - People to follow Lev Menand – @LevMenand A professor at Columbia Law with expertise in money, banking, central banking, economic governance, admin law, and separation of powers. His recent book on the Fed, "The Fed Unbound" got terrific reviews. It's on my reading list.
RESOURCES – Books, websites, podcasts, interviews, articles, videos
Robinhood's investment app has an excellent library on investment concepts and also foundational articles on crypto.
CRYPTO WORD – Store of Value A store of value can be an asset or currency, as well as a commodity. Many commodities are actually products that maintain their value throughout a prolonged period of time. An item can be considered as a store of value if its value is either stable or can increase over time, but does not depreciate. Gold, as well as other precious metals, are a good store of value due to the fact that their shelf lives are perpetual. A nation's currency has to be a reasonable store of value for its economy to be able to function smoothly. (From CoinMarketCap)
OH, ONE MORE THING – There will be a flood of crypto memes about CZ's acquisition of Alameda/FTX. This one shows CZ carrying a sink into Alameda's office. It's a play on an image that Elon Musk tweeted showing him carrying a sink on his way into Twitter's office.
Thanks for reading! See you next week.