Failing fast is not weakness ‒ it’s strength
7th November 2022 |
I woke up this morning, helped sort the boys out with breakfast, got myself ready for the day and started making my coffee.
Around the same time, I whipped out my phone to have a bit of a catch-up with the markets.
Almost immediately I could see that the crypto world was abuzz with what appeared to be terrifying rumours that the giant exchange FTX was insolvent.
Oh dear.
The inner workings of crypto exchanges are hazy at best. While many claim to be fully transparent, this couldn’t be further from the truth.
Back-door deals, wash trading, “flywheel” trading, sanction circumventions ‒ all around there’s constant chatter, and no one really knows where the where the truth lies.
I should preface all this with the fact that it’s absolutely no different in the traditional financial system. If you think crypto markets are some kind of outlier in respect to shady goings-on, you’d be wrong.
Nonetheless, the whole FTX insolvency thing has got a bit of traction online. What amplified the rumour was that Binance has decided to dump its holdings of the FTT token.
The FTT token is the native token of the FTX exchange. We first introduced FTX and the FTT token to you in August 2021. You can revisit that here.
Part of why we thought it was an important crypto project was its innovative approach to market trading. We said:
[FTX’s] new approach to stock trading and investing in conjunction with crypto trading and investing is something that, we think, has a lot of potential.
It also opens up traditional markets to people who perhaps would otherwise not have access or funds to invest in some of the world’s biggest companies.
FTX could grow into a hugely important part of not just the crypto world, but also the traditional market: it can bridge the two and create one of the world’s biggest and most valuable exchanges.
We weren’t wrong. Barons reported that, in September this year, FTX was in talks with investors to raise up to $1 billion. This would have given FTX a valuation of around $32 billion.
However, we think that’s probably not the case today.
CZ, the founder and CEO of Binance, the world’s largest exchange, posted an update on social media saying:
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.
These “revelations” were the rumours that FTX was insolvent.
CZ would go on to state that this was part of the FTX exit as a form of “post-exit risk management”. Binance was part of a funding round that helped FTX grow. And the exit last year obviously netted Binance a huge windfall (talk about timing the market!).
It would make sense for Binance to exit its entire position if it were looking to derisk its investment. Or perhaps Binance does know something.
Of course, via Sam Bankman-Fried, FTX denied it was insolvent… sort of. SBF’s response was that a bunch of “unfounded rumours have been circulating” and the company’s audited financial show billions in assets. Also, FTX is highly regulated, which I think is supposed to also instil confidence in the market.
It didn’t flatly deny it, though. So, as I say, it’s murky, and the truth probably lies somewhere in there. But whether FTX does or doesn’t have issues is almost beside the point.
You see it leads us to ask, what if FTX does fail?
FTX is a bigger operation than any of the previous failures in crypto we’ve seen before. It’s multitudes bigger than Mt.Gox, which failed in 2014. It’s bigger than Terra, and its failure would be bigger than that of the LUNA and USTC stablecoin and the subsequent collapse of Three Arrows Capital, Celsius and Voyager Digital.
In fact, people in TradFi might almost call FTX a systemic risk to crypto if it was to fail.
But in the crypto markets, is anything really systemic?
This makes us wind back the clock to 2008, when the TradFi markets were in freefall and the global financial system looked like it too was on the brink of collapse.
As we all know, the central banks of the world stepped in, bailing out lenders, ensuring the “stability” of the financial system. Many of the banks saved were seen as systemic risks to the entire financial system. They were too big, too important to allow to let fail.
As the central banks bailed out the system, they also set course for 14 years of loose monetary policy that would eventually “brick” the system. We’re starting to see the results of this now. And it’s clearly delivering the world into global recessions, soaring costs of living and a grim outlook economically.
However, what if the central banks hadn’t bailed the market out in 2008? What if they’d let the bad actors fail? What if they let them fail fast instead of allowing a fractured system to remain fundamentally flawed?
Not all banks would have failed. Some would have, some would have scraped by, some would have flourished. Arguably, it would have led to a more robust system, as the bad actors are weeded out and the strong prevail.
That’s what happens in the crypto markets. There are no bailouts. There are bad actors that get weeded out, and the strong and resilient survive and go from strength to strength. Fundamentally, this results in a more stable, robust system.
It doesn’t prevent bad participants, but it certainly makes it incrementally harder for them to survive long term. The reason this fail fast idea can happen in crypto is because it is unregulated (on the balance) and remains as close to a free market as anything on earth.
If FTX fails, it won’t kill off crypto. If would no doubt dent confidence, but it would not end it. There would be no systemic death. FTX would fail, and fail fast, and the strong would survive and flourish, absorb their assets, customers, IP and human capital ‒ and then move on.
While we don’t expect FTX to fail, we do know that, if it did, it would be another example of a major failure that wouldn’t systemically risk the entire system.
Perhaps it’s a shining example that central banks should observe and learn from rather than chastise and criticise.
Crypto to know
Below is our “Crypto to know” list, where you’ll find several crypto that we think you should be taking the time to learn and understand.
They each form an important part of the burgeoning crypto ecosystem.
Several of these crypto are doing very different things versus others.
What’s key is every crypto has its own use cases, its own guiding principles, and its own potential.
Each is to be judged and assessed on its own merits.
Our aim here is to help you understand these crypto and the wider crypto world.
These aren’t specific recommendations, but a guide to help you learn and build your confidence in operating in this space.
We will add more names to this list over time. However, if you’re new to the world of crypto, these are the names where we think you should look at to start your education and learning.
We’ve also added links to each.
The links are to what we believe, in each case, is the best resource for learning about that particular crypto.
“Crypto to Know” watchlist
- Bitcoin – it/wiki/Main_Page
- Ethereum – ethereum.org/en/what-is-ethereum
- IOTA – docs.iota.org
- Tezos – tezos.com/learn/getting-started/
- Filecoin – docs.filecoin.io
- Cosmos – v1.cosmos.network/intro
- Binance – binance.com/en/about & research.binance.com/en/projects/bnb
- FTX – ftx.com & help.ftx.com/hc/en-us
- Solana – docs.solana.com/introduction
- Secret Network – scrt.network/about/about-secret-network
Until next time…
Sam Volkering
Editor, Sam Volkering’s Crypto Network
