There’s a certain irony to the spectacle that unfolded on the crypto markets this week.
In case you missed it, the cliff notes are as follows:
- Changpeng ‘CZ’ Zhao and Sam Bankman-Fried (aka SBF), leaders of the world’s two largest cryptocurrency exchanges (i.e. Binance and FTX respectively) start trading insults over Twitter
- CZ threatens, then begins to, dump his massive bag of FTX Tokens (FTT), accusing SBF of lobbying “against other industry players behind their backs”.
- Revelations emerge that suggest FTX’s sister company, the Alameda Research venture fund, may be facing insolvency
- FTT begins to collapse, losing over 70% of its market value
- FTX customers get spooked, and begin withdrawing billions from the exchange in a bank run that had shades of Terra LUNA to it
- FTX freezes withdrawals; the exchange looks doomed
- Binance swoops in an offers to acquire FTX in a non-binding letter of intent.
It was a head-spinning couple of days that saw two of the biggest names in cryptocurrency go to war with each other, exposing tensions that were brewing under the surface for years (this excellent Twitter thread from Ethereum alumni Alex Valaitis and this article from yours truly go into greater detail).
SBF was right when he Tweeted yesterday that “things have come full circle”. CZ was one of the earliest investors in FTX in 2019, when the company was a mere freckle on the crypto exchange scene.
Few expected FTX to grow as quickly as it did- in two years, the company became the world’s second-largest digital asset exchange behind only Binance.
Inevitably, many now consider the takeover as a shrewd, if not outright belligerent, business move from CZ to lay waste to his largest competitor.
Post-combination, none of the competition will come close to Binance’s market share, so it’s not hard to sympathise with such a viewpoint, even if CZ has tried to paint it differently.
Not locked. We usually just hold. It removes any doubt that we would attack a “competitor”. Not financially sensible. We want the industry to grow together. But there is a limit to hold, lol.
— CZ ???? Binance (@cz_binance) November 6, 2022
Here’s where the irony comes in.
For the industry’s protestations against SBF’s supposedly anti-crypto, pro-regulation, pro-government approach to business, nobody has done more to centralise the power dynamics in the crypto space that CZ has with this takeover.
Binance already posts trading volumes nearly 10 times greater than the closest competition- which, if you’re wondering, is now Coinbase, followed by Kraken.
At fourth place, FTX remains a big player even after the bank run, but should the merger go through (which let’s not forget is only non-binding), those multibillion-dollar volumes will be subsumed by CZ’s Binance.
Fewer players on the scene = less diversity, less competition, and a greater concentration of power.
If anything, this drama has shown the dangers of having too many eggs in one basket.
Following CZ’s initial 2019 investment in FTX, he became one of the most powerful holders of the FTT token. He eventually used this against FTX to devastating results.
Someone recently Tweeted to “never use a token you created as collateral”.
That someone was CZ. If only he advised SBF back in the formative days of their friendship.
What about the investors?
Has anyone checked in on Tom Brady and Gisele Bündchen lately?
The NFL/supermodel power duo became FTX figureheads in 2021 after appearing in a reported US$6.5mln Super Bowl commercial.
They subsequently announced an equity investment in the exchange for an undisclosed amount- though we can be sure it was no small change.
Brady and Bündchen have since separated, so their lawyers are probably carving up their assets right now.
But with Binance’s pending FTX acquisition likely to close for pennies on the dollar, they are probably fighting over the scraps of a one-meaty investment.
Legendary comedian Larry David appeared in this year’s FTX Super Bowl slot, but he probably doesn’t have a stake in the exchange: His lack of knowledge and general scepticism of cryptocurrency formed the punchline of that particular advertising campaign.
FTX has 82 more private equity investors, according to Pitchbook, including Tiger Global Management, the hedge fund headed by billionaire Chase Coleman.
FTX’s most recent Series C round, which Tiger Global participated in, put the exchange’s market value at US$32bn, but that has likely plummeted significantly, as has SBF's personal wealth.
Once worth over ten billion dollars, SBF's name is now nowhere to be seen on the Bloomberg Billionaires Index.
Investors might be unable to get their funds back.
Sounding downbeat, SBF told investors in a letter: “I’m sorry I didn’t do better, and am going to do what I can to protect customer assets, and your investment”.
But he also stated that “our first priority is to protect customers and the industry; that’s been guiding what we do”.
It’s a reasonable stance.
The positives
Binance’s brutal takedown of FTX might usher in a new era of transparency for the centralised exchanges.
It’s overdue and by the looks of it, change may be on the horizon.
Nine exchanges – Binance, Gate.io, KuCoin, Poloniex, Bitget, Huobi, OKX, Deribit and Bybit – have agreed to increase the transparency of their reserves in recent days following a stern Tweet from CZ.
Or maybe it was a threat.