Crypto Isn’t Too Big To Fail, Even With The Help Of FTX

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“Turtles all the way down” is a convenient phrase to describe how the human mind creatively fills in gaps in logic. It is said to stem from someone’s attempt to justify to philosopher Bertrand Russell his belief that the world was floating on top of a giant turtle by imagining another turtle below, and then another, ad infinitum.

The picture fits the world of cryptocurrencies, where a recent crash in the price of Bitcoin, Ether, and other tokens has unraveled a complex chain of stablecoins, lending platforms, and trading companies that are exploding simultaneously. What was once a virtuous cycle of locked-in tokens earning interest that would be infinitely reinvested is now a vicious cycle as margin calls and liquidations occur at algorithmic speed. Each turtle seems to hide another.

The next phase includes bailouts, as the big players at the top of the crypto-speculation ecosystem – exchanges run by billionaires – step in to try to stem the panic and restore confidence. Sam Bankman-Fried, co-founder of FTX Trading Ltd., extended a $250 million line of credit to lending platform BlockFi Inc. He extended $200 million in additional credit and a separate revolving facility of 15,000 Bitcoins available to Voyager Digital Ltd., a Toronto-based crypto broker that owes $660 million to struggling digital asset hedge fund Three Arrows Capital Ltd. Axie Infinity’s crypto game hack earlier this year.

Fans say it adds a credible safety net to a $1 trillion market. “Bankman-Fried is the new John Pierpoint Morgan,” says Anthony Scaramucci, citing the 1907 banking crisis that saw Morgan and his peers pledge their own money to stop a loss of faith in the financial system. Others have compared it to Warren Buffett’s endorsement of Goldman Sachs Group Inc. in 2008.

But strip away the hype, and it still looks like turtles all the way down. Crypto is not too big to fail.

Bankman-Fried clearly has deep pockets, but his wealth is almost entirely crypto-related: Bloomberg data estimates that $6.6 billion comes from his $2.1 billion stake in Bahamas-based FTX. separate US subsidiary of FTX, $1 billion from trading company Alameda and $420 million from its recently acquired stake in trading app Robinhood Markets Inc.

It makes sense that he either wants to do some good business among the rubble or make a public show of faith in the future; somewhere along the line, its own fortune hangs in the balance. If FTX has also spent hundreds of millions of dollars on sports sponsorships, like the FTX Arena in Miami, that’s a sign that it’s leaning on a grassroots speculative demand to keep the crypto evening going, much like its distressed peers are doing.

Yet this does not represent an outward stamp of approval or introduce the kind of systemic firewall that an actual intervention by JPMorgan Chase & Co. or Berkshire Hathaway Inc. could.

At the end of last year, BlockFi had about $10 billion in interest-paying assets. the $250 million advanced by Bankman-Fried represents just over 2% of that number. Despite BlockFi’s comments to Bloomberg News that this is a “big number” that “strengthens” its balance sheet, it looks more like a company going into debt because it needs cash. BlockFi says that after a month of “cash flow positive” in May, it has come under “uphill” pressure.

And while FTX’s $1 billion a year revenue carries huge weight in the crypto arena, in terms of credit and counterparty risk, this exchange is nothing like a regulated Wall Street firm. .

FTX is headquartered in the Bahamas because, as the New York Times newspaper puts it, 80% of its revenue comes from a trading instrument that remains illegal in the United States. Despite his turnover, he is only ranked no. 22 on the ranking of exchanges by the data company Kaiko based on measures such as risk control, security and data quality. And Bankman-Fried’s memorable explanation of yield farming in April sounded like a “Ponzi scheme” to Matt Levine. Is this really the new face of Wall Street?

That’s not to say that Bankman-Fried isn’t a savvy investor; he’s clearly been successful in devising successful trading strategies and spotting bets that pay off, like his expletive-filled taunt on Twitter that he’d buy Solana at $3 a token (he’s grown more than tenfold since then).

But comparing FTX to JPMorgan, or Warren Buffett, or even the Federal Reserve – whose creation was spurred by the market panic of 1907 – is wrong and bordering on irresponsible. There is nothing on display here that would prevent Bitcoin from falling further, and nothing to suggest that FTX and others would be immune to the fallout. Martin Finnegan, a partner at law firm Punter Southall who has warned of the risks for institutional investors from offshore crypto trading platforms, says FTX shares look like “sticky plaster”.

Or, another addition to a long line of turtles.

More from Bloomberg Opinion:

• The value of crypto comes from the volatility of crypto: Tyler Cowen

• Matt Levine’s Money Stuff: Crypto, Clearing and Credit

• When Crypto Tulipmania meets the real economy: Lionel Laurent

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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