This analysis was first published in SvD Näringsliv, in Swedish, on November 9th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
A strategic masterstroke brought down one of the world’s largest trading platforms in less than 48 hours. In doing so, it may have changed the direction of the entire crypto market.
Thousands of visitors had gathered at the Token 2049 conference in London to discuss the latest in crypto. It would be hard to imagine a worse day for an event of this kind. It was the equivalent of running an “Investment Banking Executive” conference the day Lehman Brothers collapsed.
That is where the crypto market finds itself right now. FTX, the world’s second-largest exchange for cryptocurrencies, has imploded.
It is a strategic move that will be written about for a long time.
It all begins with an article in trade publication Coindesk, which obtained the balance sheet of Alameda Research — a trading firm controlled by FTX founder Sam Bankman-Fried. The balance sheet revealed that Alameda was heavily exposed to FTT, FTX’s own native token.
The problem is that FTT is not heavily traded, and therefore has low liquidity. That means a large seller can crash the price on its own.
That is where Changpeng Zhao steps in. He had previously invested in FTX, but having now seen the balance sheet, he announced on Twitter that Binance would be liquidating all of its FTT holdings.
Zhao knows the market cannot absorb this. There are no buyers. The price drops 20 percent immediately. Users start withdrawing their funds en masse.
FTX asks Binance to step in and rescue it. Binance initially agrees — then backs out when it sees how deep the hole truly is.
It is simple, elegant, and brilliant. Zhao himself claims it was not planned — but it is hard to believe a person of his experience didn’t understand what his announcement would set in motion.
Less than three months ago, Sam Bankman-Fried appeared on the cover of Fortune magazine, celebrated as a crypto billionaire and philanthropist. The fallout from this crash, however, will have effects far beyond him personally.
Trust in crypto trading was already fragile. Seeing one of the largest exchanges go under — seemingly overnight — will not help. Coinbase, the largest US-listed crypto exchange, has tried to put a distance between itself and the chaos.
FTX was also a company with enormous venture capital exposure. Sequoia — one of the world’s most prominent investors — has already written down its entire stake. Other major funds followed. Valuations that looked impressive are now worth nothing.
Crypto enthusiasts have long promised to reshape finance, to build a new system that is fairer, faster and more transparent. What this week has shown is that the industry still has a very long way to go before it can credibly make that case.
