FTX Tanks đ” What Does This Mean for Crypto?
The FTX debacle took us all by surprise, but what does this mean for crypto and the future of the market?
Crypto Made âš Simple âš: ERC-20 Tokens
On Wednesday, we went over the importance of the ERC-20 token standard for Ethereum. This is more technical than most of the things that Iâll talk about in this section, but I felt the need to bring it up because it could save you from losing your crypto.Â
Thatâs because if you send an ERC-20 token to a bitcoin address â or anything other than an Ethereum-based address â it wonât go through, and your coins will be lost.
Today, I want to answer two questions:
How do you know if your coins are ERC-20 tokens?
How do you know if youâre sending your crypto to an ERC-20 compatible address?
There are several ways to know if your coins are ERC-20 tokens, but for simplicityâs sake, Iâll tell you how I do it.
First, go to CoinGecko.com. In the top right-hand corner of the screen, youâll see a search bar. Search for the ticker symbol of your coin.Â
In this example, Iâm using Uniswapâs token: UNI. On the top left of the CoinGecko page for Uniswap, youâll see a list of information, with the first thing being the âcontract.â It should look like this:
That string of letters and numbers beginning with 0x is called the âcontract address.â We wonât go into exactly what that means today, but all you need to know for now is that any address that begins with 0x is ERC-20 compatible.
Say you have a Coinbase account and a Metamask wallet, and you have UNI tokens on Coinbase. When you send them to Metamask, youâll have to copy your Metamask address, which is located at the top of the wallet.Â
Iâll refer back to this screenshot from last week as an example:
At the top of the screen, it shows that youâre sending your crypto to the Ethereum blockchain, and under âaccount 1â is the wallet address. As you can see, it also begins with 0x, signifying that itâs an Ethereum address and compatible with ERC-20 tokens.
This is important to remember when you fund your Metamask wallet: Always check to see if the coins that youâre sending to Metamask are ERC-20 tokens. Again, you can do this by checking the coinâs contract address on CoinGecko.
Itâs been a year and a day since BTC topped out at 69,000, and weâre now seeing signs of early capitulation as FTX becomes this bear marketâs latest victim.Â
Today, I want to go into what happened, the potential gravity of the situation, how we can get a gauge on when true capitulation will hit the market, and what sorts of opportunities capitulation could present us with.
For a quick update, watch the video below. đ
What Happened?
Sam Bankman-Fried, also known as SBF, is the founder and CEO of one of the biggest crypto exchanges in the world: FTX.
Recently, there were rumors that FTX was at a high risk of becoming insolvent.
A lot of people, including myself, shook it off initially.Â
Surely an exchange the size of FTX had to be financially stable, right? After all, SBF was âcryptoâs saviorâ just a few months ago, after it made offers to bail out several victims of the summer LUNA liquidation tailspin, such as Voyager and BlockFi.
Well, thereâs another very important piece to the story here: Alameda Research. Before SBF founded FTX, he founded Alameda. He was the CEO there until October 2021.Â
Alameda and FTX had major (but not necessarily formal) ties.
For example, FTX has/had their own crypto called FTX token ($FTT). The benefit of this token was that holders of FTT got discounted trading fees, but it was a pretty thinly-traded token overall.
As it turns out, Alameda owned an alleged $5.82 billion worth of FTT as of June 30, 2022.
I say âallegedâ because that number doesnât seem to make sense. And if that were true, itâs mind-blowing considering the total market cap of all FTT tokens at the time was $8.1 billion, and around $5 billion of those werenât even in circulation yet, so itâs very strange.
But letâs give them the benefit of the doubt and say that the company wasn't committing fraud (meaning it really did have that much FTT).
It also held $1.16 billion in Solanaâs token, SOL. However, the craziest part of its balance sheet was its cash balance, which was only $134 million.
So, one of the largest market making firms in crypto had 52X more in two altcoins than in total cash? Thatâs insane!
I will mention that the CEO of Alameda, Caroline Ellison, recently spoke out and said that the company has more assets that werenât listed on that specific balance sheet. Fair enough!Â
But she also removed âAlameda CEOâ from her twitter bio on Tuesday. Iâll leave how big of a deal that is up to you.
A Recipe for Disaster: Big Debts & Low Cash đČ
Another thing that stuck out to me is that $2.16 billion of the FTT token was âFTT collateral,â which implies that the company was potentially borrowing a lot of money against it.
Borrowing against billions of dollarsâ worth of an illiquid altcoin months after watching several companies go under due to collateral liquidationsâŠÂ
What could go wrong?
Well, this:
On November 5, someone transferred $530 million of FTT to Binance. At this point, I think we can all guess who that was.
Heavy selling hit the market on Monday night, sending FTT down from $22Â to $15 in just a few hours.Â
As Iâm writing this on Wednesday morning, the price has crashed all the way down to $4. By now, we can be confident that this drop has wreaked havoc on Alamedaâs loans â especially if it used FTT to borrow USD.
The Contagion đ€
The question is, how far does the contagion go from here?
We still donât know the fine details of FTXâs financial state, but judging by the fact that SBF went from saying this:
(Ironically enough, that Tweet has since been deleted.)
To this:
âŠin a 24-hour time span, it isnât exactly reassuring.
What we also know is that, as of now (Wednesday morning), FTX users still canât withdraw funds.Â
This was one of the biggest exchanges in the game. Customers ranging from retail to whales (seven-to-nine-figure accounts) to hedge funds used FTX to hold their positions.
This is pure speculation, but if a $530 million FTT sale was enough to get FTX to capitulate and sell to Binance, one has to wonder whether all those deposits are actually there.Â
The worst-case scenario is that FTX was using these deposits like Celsius or Voyager â or any of the other companies that got hit in the last round of liquidations â and just lending them out to Alameda or someone else to earn interest.
Alameda:
By now, we know for sure that Alameda could be facing some very serious issues from the crash in FTT tokens. So, my questions are:
How many lenders took Alamedaâs FTT as collateral?
How much did its balance sheet change between June 30 and now?
How much is Alameda actually able to repay?
How likely is it that Voyager and BlockFi, after being bailed out by FTX, turned around and lent to Alameda, taking their FTT as collateral?
We saw how much damage the 3AC liquidations did to the market â and it had about $18 billion in assets under management (AUM). By comparison, Alameda had about $14.6 billion on its June 30 balance sheet.
As I noted before, Alameda also primarily works as a market maker, generating billions of dollarsâ worth of volume per day on various exchanges.Â
So, another question is: How many deals did the company have with these exchanges to provide liquid markets, and in return, the exchange lent them money and held the FTT as collateral?
Either way, itâs clear now that weâve hit the capitulation phase of the bear market. Yes, we had capitulation in May and June as well, but an FTX-driven capitulation is potentially an entirely different animal.
How Do We Measure Capitulation?
One thing Iâm going to be watching very closely over the coming weeks is the amount of BTC being held for a profit. I donât typically use on-chain data for hard buy/sell signals, but to me, this metric is a way of measuring true fear and greed.Â
There are fear and greed indexes out there, but I donât like any of them.
When people are losing money, it causes fear and panic selling. When people are in the green, they want to buy more because itâs assumed that everything will keep going up.Â
And thanks to the transparent nature of blockchains, we can get a very accurate gauge of that.
For this sort of thing, I like to use moving averages to filter out the day-to-day noise. As you can see, the seven-day moving average of the supply being held for a profit as of Tuesday night is 57.65%:
I also want to note that on Tuesday, only 47.58% of BTC was being held for a profit, which is the lowest held since the COVID-19 crash. If BTC stays low, the moving average will drop extremely fast.
In that picture, you can see that the capitulations in 2018 and 2020 took the moving average below 50.Â
It also happened back in the 2014 to 2015 bear market, and I expect the same thing to happen this time. When that happens, this is the real buying opportunity.Â
Iâm not saying that as soon as this goes below 50%, itâll be the bottom. But buying under those conditions is truly âbuying when others are fearful.â
Money to Be Made đž
I have no doubt that this bear market is going to produce life-changing money for people in the coming years.Â
While the bottom might not be in, I believe that weâre going to get the opportunity to buy some amazing crypto that has serious upside in the future.
If we see another full-blown capitulation, itâll be very reminiscent of November and December 2018. During that time, BTC crashed from $6,200 to $3,200.Â
Letâs say you bought at the average of those two prices: $4,700.
You still wouldâve seen your BTC fall by 32% in a matter of weeks. Thatâs not fun! But itâs hard to argue with buying BTC 77% below its $20,000 high (at least, for me, it is!).
Ultimately, bear markets test the patience of even the most loyal crypto enthusiasts.Â
This is why I wasnât convinced that the June bottom was in. My patience hasnât been tested nearly as much as it was in late 2018 â and I know I havenât become that much more patient!
Donât get me wrong, I understand why people are frustrated with this market. But in my opinion, the bull thesis for BTC is stronger than ever.Â
Adoption continues to grow, and HODLERS continue to HODL. I donât see that trend going away anytime soon.
During this bear market, thereâs been relentless building by crypto developers. And despite the price action, the space is becoming more innovative by the day.Â
I may be getting a little ahead of myself here, but I canât help but look forward to the next bull market! And yes, I still stick to my predictions:
BTC will make a 10X to 12X rally from its bear market low.
ETH will make a 20X to 25X rally from its bear market low
Quality altcoins will make a 30X to 100X rally from their bear market lows.
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Good morning,
Thanks for the market analysis. So it seems to me, as a moderately educated very small crypto investor, that what occurred with FTX highlights the "wild west" current nature of the crypto landscape. I would think that financial oversight via government regulation will be the factor that "tames" the "wild west" persona to allow large scale investments by established financial institutions.
I use your recommendations for crypto coin purchases. I would very much appreciate updates of your opinion as to the timeframe for government financial regulation of the crypto industry.
Personally, I would like to "time" a majority of my crypto purchases while the industry is in the "wild west" phase, but just prior to government oversight. Thanks for providing this service of letting us "look over your shoulder", I value your insights.
Stuart