This year’s Double Eleven, the biggest money burner is the currency circle.

On November 11, FTX, one of the top five cryptocurrency exchanges in the world, announced that it had filed for bankruptcy. The myth of wealth creation that took three years to reach a valuation of US$32 billion was reduced to zero in less than ten days.

The collapse of the leading cryptocurrency exchange is destined to be an industry earthquake that will affect a wider range of industries. It is not only many nameless retail investors who have suffered losses, but also well-known investment institutions such as Sequoia, SoftBank, and Temasek, while institutions in the crypto industry that are more deeply bound are still painfully cleaning their wounds, and are even struggling on the line of life and death.

The aftermath is far from subsided. Under the market panic caused by the FTX explosion, cryptocurrency platforms such as Binance, Huobi, and OKX have successively announced fund reserves to prove the safety of the platform.

Citron Research, a short-selling institution, was also stimulated. On November 15, it stated that it would come back and launch an onslaught on ETH (Ethereum): "FTX has proved that many stocks are because 'other people have done it. This has reignited our shorting enthusiasm and will continue to short ETH. In our opinion, this $130 billion token has as many common sense holes as the SBF story. ”

In addition, Grayscale Bitcoin Trust, the world’s largest Bitcoin trust fund, was also dragged into the FTX whirlpool by its brother companies. Unlike players such as Binance, Grayscale stated that it refused to accept the offer due to security concerns. Disclosure of Reserve Certificates. It is worth noting that Grayscale holds more than 630,000 Bitcoins in its hands. Whether Grayscale can get out of the crisis can be said to be related to the life of the entire encryption market.

The name 'cryptocurrency' is misleading because it is essentially a decentralized accounting method, more akin to decentralized stocks. The chaos that has emerged in the process of cryptocurrency exploring the decentralized financial market today has also appeared in the development of traditional finance in the past. Technology has no concept of good and evil. It is just that in the process of transforming traditional finance, blockchain technology has ignored Understand some basic laws of the financial industry. Hu Jie, a professor of practice at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and a former senior economist at the Federal Reserve, told a reporter from the 21st Century Business Herald.

For example, traditional finance decentralizes the business of matching transactions, securities custody, and fund custody, while today’s cryptocurrency exchanges almost monopolize power. History tells us that this structure has logical flaws. The greed of human nature is destined to cause problems at any time. Investors in these industries also understand that they are just noisy and can't care about so much. They should make money first. he added.

European Capital CEO Peter Schiff also said that the encryption industry after the FTX explosion is neither winter nor an ice age, because that means that in the short or long future, it will heat up and recover, and now it is more like extinction. , blockchain will continue to exist in the future, and latecomers will lead the re-emergence of cryptocurrencies through new assets.

FTX founder Sam Bankman-Fried is currently stranded at the company’s headquarters in the Bahamas. In addition to millions of investors, there are also regulatory agencies from many places who want to get to know him.

The establishment of a crypto empire

FTX CEO Sam Bankman-Fried (hereinafter referred to as "SBF") is definitely a legend in the currency circle. He did not forget to play League of Legends when doing roadshows for Sequoia. Just a little bit, not everyone can do it.

The story dates back to the early days of cryptocurrency. Speculators discovered that there were price differences for the same currency in different cryptocurrency exchanges. They could realize arbitrage by continuously buying and selling cryptocurrencies between exchanges. SBF was one of them. one.

In 2014, 22-year-old SBF graduated from MIT and went to work at Jane Street Capital on Wall Street. Although he studied physics, he devoted all his interests to finance. Unlike geeks who are addicted to the intoxication and fantasy brought about by blockchain technology, SBF, who is familiar with the rules of modern financial games, wants to join a fertile and rarely explored quantitative trading market.

In 2017, SBF set up its own business and founded the crypto quantitative trading company Alameda Research (hereinafter referred to as "Alameda"). The following year, he moved from California to Hong Kong.

When the website of the cryptocurrency exchange FTX (abbreviation for "Futures Exchange") he created was officially launched on May 1, 2019, no one expected that it would set off a tsunami-like wave.

At this time, competitors have already accumulated considerable popularity, including Coinbase, which focuses on security compliance and will be listed on NASDAQ in 2021, and the opening of massive trading currencies has become a global trend at that time. Binance is the largest exchange by trading volume.

With lower transaction fees and more aggressive styles, Alameda and FTX quickly emerged as new players. In addition to its crypto asset market making business, Alameda has also invested in a large number of start-up crypto companies. In addition to transaction matching, FTX also provides a series of complex financial derivatives to help customers increase leverage.

Objectively speaking, the encryption market was on the rise at that time, and the radical strategy did help SBF gain generous returns and market reputation in the early stages. However, success or failure was not the same, which also laid the groundwork for the subsequent bear market. Foreshadowing.

Among the "11 Richest People in the Cryptocurrency Industry" launched by Forbes in 2021, SBF ranked second with a net worth of US$4.5 billion, second only to Coinbase founder Brian Armstrong, who is known as "Musk in the currency circle" ".

Large amounts of institutional funds will also begin to enter the market in 2021. In July 2021, FTX announced the completion of a US$900 million Series B financing, with more than 60 investors including Sequoia Capital, SoftBank, and Paradigm participating in the investment. FTX’s valuation reached US$18 billion; in October 2021, FTX announced the completion of a US$421 million The U.S. dollar B-1 round of financing involved 69 investors including the Ontario Teachers’ Pension Fund, Temasek, and Sequoia, raising FTX’s valuation to $25 billion.

On January 31, 2022, SoftBank, Paradigm and other institutions continued to invest US$400 million in Series C financing. The valuation of FTX, which was founded less than three years ago, reached an unprecedented US$32 billion, surpassing Credit Suisse and Deutsche Bank. and other traditional financial giants.

SBF himself is extremely high-profile, from buying the naming rights of the NBA Heat basketball stadium for US$135 million, buying tens of millions of dollars for Super Bowl advertising, to acquiring the e-sports club TSM for ten years for US$210 million. By sponsoring the title and changing the team name to TSMFTX, SBF established a passionate, fanatical, and avant-garde technology pioneer personality in the eyes of the public who did not know much about cryptocurrency.

SBF is also very keen on political activities. During the 2022 U.S. midterm elections, SBF spent $40 million in campaign donations to support Democratic candidates, becoming the second largest donor to the Democratic Party. FTX’s political influence in the United States is unquestionable. SBF once satirized Binance, which has a larger trading volume, in this regard: "I can enter and exit Washington, D.C., at will, can CZ?"

On November 15, Citron Research stated that without proper review, , the US government should be ashamed of allowing such a person to gain influence so close to the government. If the FBI does not launch a swift investigation into the Democratic Party's second largest donor (SBF), this will be related to national security issues.

But we come here in a hurry and we go in a hurry. According to the Bloomberg Billionaires Index, in March this year, the 30-year-old SBF's net worth reached a peak of US$26 billion. As of November 7, his net worth was still US$15.6 billion, and it was revealed on November 8 After the liquidity crisis, SBF's value plummeted 94% that day, and with the bankruptcy of FTX, the book wealth of this legendary tycoon in the currency circle also returned to zero.

Why it collapsed

The reason for the collapse of the building was very simple. SBF misappropriated the company's funds without authorization and suffered huge losses in radical investments, which ultimately led to the inability to make up for it during the run on users. The hole in it.

As two brother companies founded by SBF, Alameda and FTX cooperate with each other. FTX is responsible for issuing tokens FTT, and Alameda is responsible for raising the currency price. FTX can also secretly sell more low-price FTT to Alameda in the early stage, allowing the latter to earn higher profits in the secondary market. In the chaotic currency market, these are all undisguised practices.

On November 2, the encryption industry media CoinDesk published details of Alameda’s balance sheet, and the market discovered that something was wrong.

According to the report, as of June 30, Alameda’s largest asset on its books was FTT of US$5.8 billion, accounting for 88% of its net assets. At the same time, there were US$7.4 billion of loans on its books. The circulating supply of FTT is only about US$4.36 billion.

Combined with the disclosure of more details afterwards, Alameda purchased a large amount of FTT at a low price and after pushing up its market price, did not choose to sell it to make a profit. Instead, it used the high-priced FTT as collateral to borrow money from FTX, and these The loans are coming from FTX misappropriating customer funds.

Of FTX’s US$16 billion in customer assets, more than US$10 billion was used by Alameda in the bear market to implement its usual aggressive strategies. As a result, FTX had a US$8 billion gap when it faced a run on users.

After the balance sheet was disclosed, the market smelled danger and began to flee on a large scale. Binance CEO Changpeng Zhao (hereinafter referred to as his English name "CZ"), FTX's largest competitor, joined the sell-off team on November 6, saying that he was worried that FTT (FTX's native encryption token) would suffer an instant collapse like Luna. In the next few months, he will sell off all FTT-related assets worth US$2.1 billion on the book.

At this point, FTX is still trying to restore the general trend, and responded that if Binance wants to sell FTT, it is willing to spend $22 per coin to repurchase it. However, the seriousness of the situation far exceeded FTX's imagination, and what's funny is that, according to the relevant details disclosed later, SBF, which had extremely failed in the company's internal management, had no idea how much cash it still had on its account.

SBF has since stated that FTX received approximately $5 billion in withdrawal requests on November 6. KiYoungJu, co-founder and CEO of on-chain analysis company CryptoQuant, said that FTX stablecoin reserves plummeted from an average of US$700 million two weeks ago to US$51 million on November 7, a drop of 93%.

Liquidity dried up rapidly, FTX had to suspend customer withdrawals on November 8, and FTT also began to show a downward trend. Seeing that it was about to fall into a "death spiral", FTX could only call for emergency help.

On November 9, SBF publicly stated that it hopes and requests Binance to acquire FTX. CZ, which had received SBF’s request for help the day before, also stated on November 9 that Binance intends to acquire FTX and has yet to do its due diligence. investigation. But on November 10th, Binance changed its mind. "These problems are beyond our control or ability to help" and announced that it would abandon the acquisition plan.

As a result, FTX, which had lost its last lifeline, quickly announced its filing for bankruptcy on November 11.

The absurdity of absurdity

Once upon a time, cryptocurrency has always been known as "digital gold", and this has been used to demonstrate its safe-haven value.

The portrait of investors in the early crypto market was biased towards 'geeks'. They did not care whether the Federal Reserve raised interest rates or released funds. They used the money to speculate in currencies, which led to the trend of crypto assets. Completely different from traditional financial assets such as stocks, for institutions, if assets can be reasonably allocated to a variety of low-correlation projects, the effect of risk diversification can be achieved. Hu Jie told the 21st Century Business Herald reporter.

At the beginning of 2020, the Federal Reserve issued a large amount of currency in response to the epidemic crisis, triggering market concerns about the depreciation of U.S. dollar assets. In order to hedge risks, institutions began to pay attention to crypto assets, and Bitcoin also ushered in a bull market. It rose all the way from a low of $5,000 in March 2020 to a peak of $63,000 in April 2021.

There is a saying circulating in the economics circle, "If there is a 300% profit, then the capitalists will trample everything in the world." This seems to explain why well-known investment banks such as Sequoia and Temasek take risks. Taking risks, betting wildly on FTX, which is full of loopholes.

But later we gradually discovered that crypto assets and traditional financial assets are increasingly dependent on capital adequacy. That is to say, as more and more traditional investors enter crypto assets The market and market capital style have changed, from the original geeky retail investors' "comfort" to today's institutional capital dominance. This means that Bitcoin, like stocks, depends on the face of the Federal Reserve, so the avoidance of crypto assets The risk value no longer exists. Hu Jie told the 21st Century Business Herald reporter.

In the liquidity crunch caused by the Federal Reserve's interest rate hike this year, the currency circle has not been able to get out of the independent market. From the beginning of the year to the eve of the FTX thunderstorm, the price of Bitcoin fell from US$47,000 to US$20,000, hitting a wall. Institutions also evacuated the battlefield as soon as possible, assessed losses and appeased investors and the market.

The fastest responder was Sequoia. After Binance publicly announced the cancellation of the acquisition on November 10, Sequoia immediately issued a statement stating that it would not be able to judge the severity of FTX’s liquidity risk. The entire value of its $214 million investment was written down to zero, and it said the risks would have limited impact on Sequoia.

Some investments exceed expectations, and some investments are disappointing. In fact, we have conducted due diligence on every investment. At the time of investment in 2021, FTX generated $1 billion in total revenue and $250 million in operating income. Sequoia said in a statement.

However, Sequoia must have let go of the investigation into FTX’s internal management, intentionally or unintentionally.

After FTX-related companies filed for bankruptcy, SBF resigned as CEO of FTX and was replaced by John J. Ray III (hereinafter referred to as "Ray"). After intervening in FTX's bankruptcy liquidation, Ray, who has 40 years of legal and restructuring experience and previously handled Enron's financial fraud that shocked the United States, also shouted that the FTX Group's internal management and fund abuse have become ridiculous to an outrageous level.

In my career, I have never seen such a failure of corporate internal controls, nor have I ever seen such completely unreliable financial information. Ray said in documents filed with the U.S. Federal Bankruptcy Court that control of the company was in the hands of a very small number of inexperienced and immature individuals.

Specific details include but are not limited to FTX’s company funds being used to purchase personal properties, FTX’s inability to provide a complete list of employees, and FTX, as a digital asset exchange, does not even keep accounts. A lot of it is legal common sense that SBF apparently failed to learn from his Stanford law professor parents.

Any mature financial practitioner knows clearly that this is an area lacking rules and supervision, but the absurdity lies here. Under the temptation of huge profits, professional investment institutions completely ignore common sense financial principles. The rules and logic of the game have made many stupid mistakes. What is happening in the cryptocurrency circle today is actually repeating the childish scam of the American financial system in the barbaric era two hundred years ago. Hu Jie told the 21st Century Business Herald reporter.

On November 15, SoftBank stated that it had written down its investment of less than US$100 million in FTX to zero. At the same time, it stated that the investment only accounted for a small part of its US$100 billion Vision Fund and had no impact on the entire There will be no material impact on the company's share price. Former SoftBank chief operating officer Marcelo Claure said that he "was a complete failure" in FTX, saying that he was influenced by FOMO (fear of missing out) at the time and did not fully understand what he was investing in.

On November 17, Temasek issued a statement deciding to write down its entire US$275 million investment in FTX and admitted that it had misjudged FTX. “It is obvious from this investment that maybe we Trust in SBF's actions, judgment, and leadership is formed by our interactions with him and the opinions expressed in our discussions with others. "

Cryptocurrency Ecological Disaster

For these investment institutions that are relatively dispersed in the market and do not focus on encryption as their main business, it is at best like a layman being slapped twice by the market. The worse impact of FTX’s thunder is that it destroys the entire encryption ecosystem.

On the one hand, the crypto institutions around FTX have suffered a greater impact from bad debts, and the resulting wave of bankruptcies will inevitably lead the crypto market into a deeper vicious cycle; on the other hand, the rules and systems are extremely imperfect. In the field of crypto finance, leading institutions often represent the future of the industry. Now that the hypothetical security of "too big to fail" has been falsified, institutional funds that entrust the crypto market to prosperity will encounter greater challenges. The crypto industry is facing liquidity. sexual risks.

Take Genesis Global Trading (hereinafter referred to as "Genesis"), the largest lending institution in the world's currency circle, as an example. On the day FTX announced it filed for bankruptcy, Genesis publicly stated that its derivatives business had about 100,000 yuan locked in the FTX trading account. US$175 million in funding, "but this will not affect our market making activities. Additionally, our working capital and net position in FTX are not material to our business, and the situation at FTX has not hindered the full operation of our trading operations." ”

Genesis is the brother company of the Bitcoin Trust Fund Grayscale mentioned at the beginning of the article. Both parent companies are Digital Currency Group (hereinafter referred to as “DCG”). As one of the few Wall Street companies that focuses on blockchain and A financial giant in digital currency investment, DCG is also the largest cryptocurrency investment fund in the world. Its tentacles extend to almost every corner of the blockchain-based business, including the aforementioned CoinDesk, the largest media organization in the encryption industry, and its many subsidiaries. one.

In May this year, Three Arrows Capital exploded. DCG assumed a debt of US$1.2 billion for Genesis. After the second scandal of FTX, Genesis received an equity injection of US$140 million from DCG to optimize Genesis. balance sheet and solidify its position in the crypto market.

Even with a strong backing like DCG and having made it clear that it would not be affected by FTX-related businesses, Genesis quickly announced that it could not withstand the pressure.

On November 16, Genesis stated that it would suspend redemptions and new loan issuances after encountering "abnormal withdrawal requests" after FTX went bankrupt. Genesis interim CEO Derr Islam said that the withdrawal requests exceeded the level that Genesis' current liquidity can bear, and he hopes to find any way out other than bankruptcy.

At the same time, Genesis is also one of Grayscale's liquidity providers. If Genesis explodes, Grayscale cannot escape unscathed. On the contrary, Grayscale is DCG who demolishes the east wall to make up for the west wall and rescues Genesis. One of the options for liquidity crisis.

Another concern comes from whether there is a behind-the-scenes deal between Genesis and Grayscale like Alameda and FTX. However, Grayscale refused to disclose the reserve certificate due to security concerns. As the largest holder of Bitcoin, Grayscale is also becoming the market focus in the shadow of FTX.

In addition, the cryptocurrency exchange Gemini also announced the suspension of redemptions of high-yield products for retail investors. Another cryptocurrency lender BlockFi also suspended user withdrawals and later admitted to FTX and The relevant companies have a large number of risk exposures, and it is not ruled out that they will eventually go bankrupt?

The market impact goes far beyond that. In the two days after FTX's liquidity crisis on November 8, Bitcoin plummeted from US$20,000 to US$15,000, hitting a new low since November 2020. Mining institutions also felt the impact of FTX from afar. chill.

Competitors proved themselves innocent

After FTX exploded, the competitors were not idle either.

Faced with market panic, many cryptocurrency exchanges such as Binance, Huobi, and OKX are competing to make promises to customers and provide evidence that they have sufficient reserves to pay customers. .

On November 23, OKX announced that the platform has urgently launched the Proof of Reserve (PoR) function to visually display the user account assets during the audit, as well as the platform’s asset reserves of USDT, BTC, and ETH. Efficiency and avoid security risks caused by opaque funding situations.

The relevant person in charge of OKX told the 21st Century Business Herald reporter that PoR is a common audit system in the encryption circle, which aims to use non-tamperable data processing technology to prove the integrity of the exchange chain. The reserve is sufficient to cover the user's principal stored on the platform.

PoR divides the audit process into two modules: the own assets on the exchange chain, and the user's principal deposited in the exchange. If the former amount is greater than the sum of the latter, then the exchange can be said to have sufficient asset reserves. Since the former is all on-chain, it can theoretically ensure the transparency and authenticity of the amount, while the latter uses the MerkleTree (Merkle Tree) processing model.

MerkleTree, simply put, incorporates the account assets of exchange users that meet the audit conditions as independent IDs into an extremely rigorous and non-tamperable data processing network, ensuring that all IDs are unique. It is counted accurately and accurately, and the result is the total principal of all users of the exchange that is completely authentic and trustworthy. Users can compare OuYi's on-chain wallet address assets with OuYi's within the Merkel tree root. The user's total assets can also be reverse-audited on this result to check whether his account has been included in MerkleTree. The person in charge stated above.

Cryptocurrency exchanges like Binance have now taken a step forward. That is to say, after I get the money, I can make my fund custody business public through MerkleTree and other operating methods, and the platform Every action will have traces for everyone to supervise, but the question is, why should the money be handed over to the exchange for custody? Hu Jie told the 21st Century Business Herald reporter.

We see today that stock exchanges are only responsible for matching transactions, and the custody of funds is handed over to banks. This is because traditional finance has stepped on the thunder. The concentration of power will amplify human greed. If there is no reasonable custody, Then there will always be people who will misappropriate it. Cryptocurrency trading is like buying and selling stocks. There is nothing wrong with the trading itself, but if this institutional loophole does not change, this form of trading will always have the risk of explosion. he added.