Comments on FTX
Here's some of my thoughts and collected tweets around the FTX show.
Hi there,
Surprise, expected a Friday Flight?
Well not this time. As I was actually on my flight home Wednesday, the FTX fiasco was happening. I decided that I’d wait to the end of the week to publish content related to it.
I love me a good financial crypto-driven corporate drama.
Enjoy.
As always, you’ll find TL;DR: and graphics at the beginning of each section.
Obbligato!
Relevant Past Content
Luna Fiasco: Algorithm-Backed Stablecoin gets wrecked by Panic Speculation
Sections You Can Skim To
The Celsius Meltdown
BlockFi Gets Hit
BlockFi Gets Acquired by FTX + The Rise of FTX
FTX to be Acquired by Binance
Binance to No Longer Acquire FTX
Why did this happen?
How Do You Spot Risky Company Investments?
A Comment on the Loss and Regulation
The Celsius Meltdown
TL;DR: Unicorn company didn’t know how screwed it was, financially, as a result of irresponsibility and lack of awareness on financial positions.
Sometime ago, and by sometime, I mean June 13 2022, Celsius Network ceased trading on the platform and would subsequently enter Chapter 11 Restructuring Bankruptcy on July 14, 2022.
Recap:
It had 3 CFOs in 18 months - the first got arrested, the second resigned, and third was an internal promotion like 3 days before filing bankruptcy
Celsius had completed a $750m Series B Funding putting it at a $7.5b valuation. This was in November 2021, right before the 1st CFO got arrested.
February 2022 -Second CFO hired and starts
June 13, the Celsius Network halts trading.
June 30, 2022 - Second CFO resigns
July 14 - Celsius files for bankruptcy.
Here’s my specific newsletter post summarizing the escapade. Also, this was heavily impacted by the TerraUSD fiasco, which I wrote about here.
The impact Celsius had was huge. How huge?
BlockFi Gets Hit
BlockFi was a competitor to Celsius Network. It was hit with a massive withdrawal spree, among many other things happening, that subsequently led to an incredibly dire situation for BlockFi.
Note: Zac is the CEO of BlockFi.
BlockFi to Be Acquired for $240m by FTX
Essentially, BlockFi faced massive liquidity issues and need a credit line to continue operating. That credit line was provided by FTX.
When I first heard of FTX, well, I didn’t really put much thought into other than “it’s probably another competitor trying to do the same thing but has more capital to survive windfalls”.
A look at the history of FTX proves that correct:
Quick History of FTX
Founded May 2019 by Sam Banksman-Fried, often referred to as SBF. He was basically an investment banker and quantitative trader.
Changpeng Zhao of Binance purchased 20% of FTX, 6 months after starting (so November 2019).
July 2021 - FTX raises 900m at a $18b valuation from many big investors including Softbank and Sequoia Capital. Binance at this time sold its stake.
October 2021 - FTX raises an additional $420,690,000 in a Series B-1 fuinding round.
January 2022 - FTX raises $400m in Series C, at a $32b valuation.
FTX has raise more money in less time, beating out Celsius Network.
So anyway then this happened.
FTX to be acquired by Binance.
Note on Terminology:
LOI = Letter of Intent.
DD = Due Diligence
There was already a relationship between FTX and Binance at the founder level. Following the fiasco of Celsius Network and BlockFi, FTX found themselves in the same position of needing a credit line to stave off the liquidity crisis it faced.
Now in the announcement of this acquisition, there was a lot of rumors on the god-tier status of Binance, and the level of possible espionage in play.
Thanks to John B. for sharing this.
I’m fascinated by a lot of financial recaps out there in that there’s a high propensity for misinformation, Donny Kruger effect, and applied savior-complexity bias all in one. These are highly entertaining, and are the equivalent of street-level gossip at a tavern. While this tweet thread isn’t necessarily wrong, it’s also not verifiable or factual and should be treated with high skepticism and speculation.
Anyway so here’s what happened after the Binance did its financial due diligence.
Binance to No Longer Acquire FTX
After seeing the financial books of FTX, Binance would need to cover $7b - $8b in FTX’s debt.
This resulted in:
And has led to this:
The Luna Celsius Blockfi FTX story is still being written today, so we’ll see where this goes next.
It’s nice to see a founder publicly own up to their mistakes. But for me, I don’t care for public sympathy. We’re already passed that.
Why did this happen?
TL;DR: Liquidity issues from over leveraged assets stemming from a severe lack of awareness in financial performance, obligations, and stipulations.
What you are seeing between Celsius, BlockFi, and FTX is an issue of mishandled liquidity. Basically cash-projections were so off that they couldn’t fund the business, and each company resorted to desperate measures to maintain operations.
Liquidity, or cash-on-hand, is a key concern for all companies including all the companies you are seeing layoffs right now. We don’t pay bills on promises. We pay them in cash.
In the case of FTX, they were too overleveraged to an unknown and alarming amount that not even their leadership truly knew their financial position until it was too late.
While not exactly the same, a more relatable example would be this: Imagine you are married and your significant other manages all the finances. You then receive in a mail debt collections notice. You ask what it is to your Finance managing SO. Your SO finally admits that they had been using new credit cards and loans to pay off old loans, and that here wasn’t enough money and creditors that would help.
Can you guess where this is going?
How Do You Spot Risky Company Investments?
TL;DR: You can sign me up if I see Investor Appetite for Strong CFO Function Backed by Reputable Public Accountants in there.
Here’s my current thought process on whether or not I’d invest in to a Crypto Company Anything
Is the CFO function built out and has robust reporting capabilities?
If No
100% chance they don’t know their numbers.
If Maybe / Unknown
Are there investors who have a strong demand for financial rigor and responsibility that could literally strong arm the CEO into building out a CFO Function?
Great, be prepared for the healing pain of real financial numbers that will directly impact the growth and momentum of the company. After all, who wants to hear that “We don’t have as much as what we told investors?”
Is there a history of looking at the CFO function as a “cost-center” that should only focus on “tax bill”?
Congrats, they probably don’t know their numbers.
If Yes
Are there Big 4 / Recognized Public Accounting Firm lineage in there?
Here’s my bag of money.
If Not: Lol &#$* off.
A Comment on the Loss and Regulation
TL;DR: Financial regulations are written in the blood of individuals who lossed their savings.
I empathize greatly with all those who have lost their deposits to institutions who had no business being marketed as institutions.
During the last bull-run, I heard a lot about “no regulations”.
In this bear market that seems like collapsed 3 times in a row this year, I don’t hear those voices. Instead, I hear stories of people losing their entire life savings, repeatedly.
FDIC - the thing that insures your actual bank account - is like OSHA regulations. Blood had to be spilt before it was written.
There’s a great reason why we have banking and financial regulations. Unfortunately Crypto has an industry hasn’t learned its lesson yet - I hope this fiasco would be the waking call for financial regulation, but I doubt it.
p.s. you could totally pay me to bring my sickle in to your crypto company to see see what your financial position is at. It’s fun.
Love this one, keep em comin'.
Yeah so FTX filed for bankruptcy today. LOL.