The fall of FTX is teaching the crypto world some harsh truths
by Temple Melville, CEO of The Scotcoin Project Community Interest Company (CIC)
It has been a tumultuous year for crypto – markets have fallen precipitously from the pandemic highs, with Bitcoin down around three-quarters on where it was one year ago. It has been much worse for others.
The turmoil of the past 12 months has culminated with three significant industry failures: Celsius, Terra, and now FTX. With those have come some harsh lessons, but some commonalities too which point a way forward.
Perhaps chief among them, never use a token you created as collateral. FTX, Celsius, and Terra all did this and it proved central to their undoing. The situation at FTX is still unfolding as I write, but the hole in its balance sheet will only get bigger as the price of its token disappears through the floor. Unfortunately, the same is likely to apply to all of its sister companies, as they bought a lot of FTT token to support it.
If you are going to create a token, recent events have taught us you also need to have the cash available behind it for withdrawals. This is the question that has continually been asked of Tether – what are the assets backing it? Not too long ago, USDT had 17% of its token redeemed – the cash had to be there instantly and, thankfully, it was.
READ MORE: Binance pulls out of FTX deal
Secondly, we heard a lot in the run up to these events about ‘using capital efficiently’. The liquidity pressures that ultimately led to the situations at these brokers and lenders means all crypto businesses should have large reserves to draw on and certainly shouldn’t rely on borrowing to fund themselves.
Thirdly, there is now a question mark over competition. When it was mooted that Binance might acquire FTX – albeit, there is little surprise it walked away – this could have marked a fulcrum for the digital asset industry.
Had it gone through, the acquisition may have prevented a black swan event, but would it have helped the industry over the long term? Consolidation of exchanges may be necessary, but, as ever, fewer players mean less competition and we need to carefully consider what this means for the health of crypto in the future.
Markets have obviously dropped significantly on the back of the news about FTX, but that was to be expected. You would not rule out further bad news to come and anyone holding tokens should prepare themselves for that likelihood. I expect there to be further falls in the value of Bitcoin and Ethereum, as there will be massive losses from this latest debacle.
However, once these short-term jolts to the system are out of the way, I would expect to see a steady move upwards over the period up to the halving in 2024, when the reward for mining Bitcoin is cut in half once more, with an effective increase in deflation for it.
In the last 24 hours, there have been around $8 billion excess buys to sells, which helped lift Bitcoin from a low of $15,500 to about $16,500 – although, it has since fallen from there.
There is a lot of uncertainty at the moment and fears over contagion are real. But the positive news is that Coinbase has said it holds no FTT or exposure to FTX and Binance has walked away from a deal that could realistically have sunk it.
The greed of the pandemic period has given way to extreme fear. Putting aside his well-known views on crypto, those who have been here before would do well to bear in mind what the ‘Sage of Omaha’ – Warren Buffett – has to say about times like these.