How Bad Is the FTX Mess

Anyone who has paid attention to what we say at Top Gun Options knows that we do not like and have never liked cryptocurrencies from Bitcoin and Ether down to the most recently mined of tens of thousands of tokens. Our argument against Bitcoin and the rest is basically that they are a Ponzi scheme. Crypto currencies have no basis for their valuations. When the S&P 500 goes up it is because companies either made more money or, at least, the market thinks they will make more money and be more valuable. However, something more damning has become apparent in regard to the crypto world. Crypto exchanges used their potentially valueless tokens to provide the appearance of wealth and security in order to entice investors to pay them money and then have gone bankrupt as a crypto “winter” has set in. The most recent and potentially most dangerous is the collapse of the FTX crypto exchange. How bad is the FTX mess and will it potentially result in wider financial damage?

What Is FTX and Why Are They In Trouble?

FTX was one of the largest cryptocurrency exchanges featuring the FTT token. They were said to be worth about $32 billion a year ago at the height of the last crypto surge and still had a reported worth of as much as $16 billion just a month or two ago. What nobody was aware of was that the US Attorney’s Office for the Southern District of New York was already investigating FTX as well as other crypto businesses for months as noted in a recent article by Bloomberg. The prior investigation had to do with companies potentially involved in money laundering and their onshore and offshore operations. That investigation will likely switch gears as FTX has collapsed and filed for bankruptcy.

Messy or Absent Accounting and Crypto Funny Money

A year ago Bitcoin peaked in value at about $67,000 each and about two weeks ago it was trading around $20,000. The same degree of devaluation hit the entire crypto realm over the last year. Companies that were highly leveraged went out of business. A suggestion that the FTX crypto exchange might not have the assets to cover their tokens caused the crypto equivalent of a run on the bank. FTX was one of the largest crypto exchanges so they asked Binance, the largest, to consider a buyout. Initially Binance said yes and then, after looking at FTX’s books, they said no. The FTT token fell by about 90% and the company filed for Chapter 11 bankruptcy protection. What has become clear is that FTX had about 130 business entities and was using their FTT token, mined by them, as equity for many of the entities. That was essentially a business loaning money to itself. At this point in bankruptcy filings FTX says it has about $10 billion in assets and $10 billion in debts. The problem in the crypto world is that people have made money by paying dollars for crypto tokens which then have become more valuable creating instant and impressive profits. Unfortunately, that only works when crypto keeps going up. When crypto goes down folks now owe dollars and are holding relatively valueless crypto tokens. Such seems to be part of the dilemma for many in the FTX mess.

Why Is Bitcoin Down Even More?

Panic is spreading across the crypto world. Before the FTX mess surfaced Bitcoin, which is not related to FTX or its FTT token, was trading in the $19,000 to $21,000 range. Today it trades in the $16,000 range. Many crypto exchanges may be in trouble similar to that FTX finds itself in because of overleveraging due to their belief that “crypto always goes up.” For years the mantra of crypto believers was that Bitcoin and the rest were safe havens when political, social, and financial chaos hit. In times of war, inflation, and the demise of fiat currencies crypto currencies would rise to conquer. But, in the last year we have seen the worst inflation in 40 years and the bottom has fallen out of the crypto market. War is raging in Ukraine and the dollar is stronger while crypto companies are going out of business. Investigations have shown that Bitcoin wash trading is common which means big players are manipulating an unregulated market. The bottom line is that faith in crypto drove the market up and loss of faith in crypto is driving it down. Unlike the stock market, crypto businesses do not have assets to fall back on like factories, products that people buy, patents on processes for which others pay to use, or dividends that sustain investors quarter to quarter. The bottom line is that the FTX mess is pretty bad because it is an example of the mess that crypto is in and that mess is likely to keep getting worse.