The FTX fallout isn’t over yet, but it ‘isn’t disastrous’ for the crypto industry: DigitalX
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Move over, Terra Luna and 3AC. You too, Celsius. The fallout from the biggest crypto implosion of the year continues. For further insights on the FTX debacle, Stockhead spoke with top blockchain technology and investment firm DigitalX.
Not up to speed on the FTX crypto-exchange drama? It’s a fast-paced, white-knuckle ride starring FTX boss Sam Bankman-Fried (aka SBF) and Binance CEO Chanpeng “CZ” Zhao, with guest appearances from the highly illiquid FTT token, the overexposed trading firm Alameda Research and thousands of faceless panic-seller extras.
Stockhead spoke with a few local Aussie crypto experts about it all yesterday, and now we bring you commentary from two more – DigitalX Head of Funds Management Jeremy Balding and the firm’s Digital Asset Investment Analyst Pratik Kala.
Hi, both. Can you please give us DigitalX’s take on the FTX implosion so far and if the firm managed to see it coming?
Jeremy Balding: Sure. For all intents and purposes, we identified this crisis over the weekend. And once we’d assessed everything, we determined that it was really more of an insolvency issue than anything else – as well as two large participants [SBF and CZ] going up against each other – and realised the damage and the fallout that it could potentially have.
So from a risk/reward profile, it was just no longer worth us having that position in our portfolio.
By position, do you mean the FTX exchange token FTT?
JB: That’s right. We liquidated that FTT position on Monday, after we had some time to sit down with the investment committee and discuss it early Monday morning. Thankfully, that was the right thing to do, although, to be honest, I didn’t think it [the FTX/FTT bank run and broader crypto sell-off] would turn out to be quite this bad.
Well played. Can you talk us through how you identified the problem before the worst of it all went down?
Pratik Kala: So last week, there was a CoinDesk article circulating that talked about the fact that a lot of Alameda’s [FTX CEO Sam Bankman Fried’s trading/venture firm] balance sheet was actually backed by their own token – FTT.
We picked that up immediately as it hit the press and analysed it. We were cautious as sometimes these sorts of articles are leaked to the press and have little substance to back them up.
What really triggered a red flag for us was when the CEO of Binance, CZ, over the weekend began liking tweets that were speculating on Alameda being insolvent.
Someone of his industry prominence doing such a thing… it made us take notice. Shortly afterwards, CZ publicly said that Binance was basically going to be offloading its FTT position and mentioned Luna in the same tweet, which we know suffered a death spiral five or six months ago. [The Terra Luna crypto ecosystem imploded in May, costing investors tens of billions of dollars.]
We were on top of it all on Sunday afternoon, and discussed pros and cons and made our decision on Monday morning, as Jeremy said.
It doesn’t seem to pay to take your eyes off crypto for much more than a few minutes, really does it.
JB: No. And we’re a team of five. And literally every single person was coming up with the same concerns and the red flags. And although this is something that we managed to address, the wider story is not over insofar as it affects the crypto industry.
Obviously, CZ has been doing due diligence on FTX [regarding the proposed takeover of SBF’s firm from Binance]. And they may or may not agree on a valuation. Binance may end up being the asset owner in this, but there is a chance that the deal doesn’t go through. That’s what’s currently at stake here and what’s still a risk for the market.
[Update: it appears that Binance has indeed now walked away from the proposed FTX acquisition deal.]
At the risk of sounding overly fatalistic about this, would you describe what’s happened so far with this story as disastrous for the crypto industry?
JB: I’d say that while it’s not over yet, this isn’t disastrous. I don’t think this needs to be a panic-type event. I think we need to wait and see how it plays out.
But from our perspective, we’ve been heavily considering the second- and third-layer effects that this may knock on to. So, it is something we need to be seriously considering with regard to how we construct our portfolio and what happens in the market.
What do you think we can we expect in terms of price volatility based on this event?
PK: FTX is one of the largest derivative exchanges out there, so naturally, as it’s going under, a lot of the derivative traders have lowered or closed their positions.
So yes, it’s going to be very volatile and should remain that way for some time.
It’s just very opaque with regards to some of the holdings of Alameda and the locking schedules and so on, and what they have lent out to other lenders. We’ll be watching it all very closely over the next week.
What would you like to tell your investors right now in terms of some reassurance?
JB: Most people in this space know this is a volatile asset class that comes with a lot of risk.
But we are currently already pretty defensively set up. We’re as defensive as we can be right now in this kind of market. We haven’t gotten through the “crypto winter” yet and the sector hasn’t bounced yet.
So for the time being, we’re going to remain defensive, while looking for opportunities to change stance, but overall we’re still in a defensive mindset. Rest-assured, the majority of our fund assets are secured with an institutional grade custodian with insurance. The fund does not have any exposure to FTX.
Has any of this latest news affected how you view crypto assets and the global crypto industry in the long run?
JB: No, it hasn’t changed it. If you look back through 2022, the institutional adoption has significantly accelerated with the likes of investment banks Blackrock, Fidelity and JPMorgan coming into the space and transacting. So I’m even more committed to this market.
Also, there’s Goldman Sachs, which has done some work with FTX in the past. It’ll be interesting to see what they do next. It may even bring them closer into the conversation, closer to the space.
But overall, for the moment, it still all feels like a continued fallout from this whole year. It hasn’t quite stopped yet.
Can anything good come from the ashes of this latest crypto debacle?
PK: So first of all, nothing’s changed for me, either, we’re still very positive about the Web3 thesis and the value it will bring to the world over the next decade or so.
In regards to what good has come out of this, the best thing is that, as CZ has tweeted, Binance will very publicly be disclosing all their live account balances to the public going forward.
They’re going to be providing oracle proofs, cryptographic proofs, so to speak, on all the balances they hold on the exchange.
And that sort of transparency is going to be the gold standard going forward, which should engender a level of trust that has been lacking in the industry. I expect that alone can make a huge amount of difference for the better.
At Stockhead we tell it like it is. While DigitalX is a Stockhead advertiser, it did not sponsor this article. None of the contents of this article represent financial advice.