Last week, the crypto industry experienced a truly seismic event — the collapse of the cryptocurrency exchange FTX, an implosion that some are calling crypto’s “Enron” or “Lehman moment.” No matter what it’s called, nearly everyone agrees that it’s a devastating blow to the perceived legitimacy of cryptocurrency.
What Killed FTX?
First, it’s important to be clear about one thing — FTX mismanaged its clients’ funds in an astonishingly irresponsible way, leading to its failure. How the exchange managed to hide this fact for so long is a discussion for another day, but when it finally came to light and this “plot” started to unravel, things moved quickly.
At the heart of the entire downfall was Changpeng Zhao — or CZ for short — the co-founder and CEO of Binance, a rival exchange. It’s no accident that with FTX gone, CZ’s Binance is now the largest crypto exchange in the world.
By selling its entire stake in FTT, FTX’s native token, CZ and Binance exploited fundamental weaknesses in FTX’s structure. This forced FTX into a liquidity crisis as customers began demanding withdrawals worth $6 billion - withdrawals that FTX was unable to cover. After reaching out to venture capitalists for help, which proved fruitless, FTX’s founder Sam Bankman-Fried eventually turned to CZ and Binance for a de facto bailout.
Although it was initially reported that Binance would acquire FTX’s non-US business and save the exchange, CZ pulled out of the deal the next day. So instead of saving FTX, he effectively hammered the final nail in its coffin and secured its death. His biggest rival now dead, CZ stands unopposed in his hegemony over the crypto space.
What We Should Learn
This is not to try and portray CZ as some sort of “Bond villain,” deviously plotting FTX’s demise from his secret mountain lair (although that may not be too far from the truth). CZ’s character, methods, and true intentions aside, this entire episode demonstrates the value of pruning the crypto ecosystem of its malicious, deceptive, and inefficient elements.
As CZ himself said after FTX’s downfall, “We have seen over the last several years that the crypto ecosystem is becoming more resilient, and we believe in time that outliers that misuse user funds will be weeded out by the free market.” This couldn’t ring truer.
At Gumbo, we’ve made no secret of our contention that the crypto ecosystem is filled to the brim with scams and projects that have no value. A largely unregulated space, it’s, unfortunately, an ecosystem that thrives on hype and preys on and even promotes an unrealistic “get rich quick” mentality.
It’s that segment of the industry that gets most of the attention, which does a terrible disservice to the many legitimate players in the market — the real diamonds hidden in the rough that are constantly obscured by the gaudy scams that make headlines and leave retail investors ruined. We’ve long said that something needs to change. Hopefully, the collapse of FTX can usher in the changes we need.
In the end, it’s ironic that Bankman-Fried, who has long been one of the most vocal proponents of increased crypto regulation, may actually ignite the spark of regulation in the crypto space because of his massive scam and subsequent downfall. The fate of FTX should be a warning to other would-be scammers that the market is watching and coming for them. It may also serve as a wake-up call for government officials on the importance of regulation in the crypto space.
Where Do We Go From Here?
It’s understandable that investors fear regulation. The knee-jerk reaction is that more regulation means less room for profit. But we don’t believe that’s the case here. We believe that a higher level of scrutiny and regulation in crypto will only help in the long run. It will attract more institutional money to coins and projects that have real value and solve real problems while exposing and making life difficult or impossible for scam projects and Ponzi schemes.
Yes, we may be on the cusp of another crypto winter, and the next year or two may be a “dark age” where some crypto funds die, lots of coins go bust, and investors lose money. But this process of burning waste in the crypto market will leave it cleaner and more ready to reach new heights as a legitimate industry.
Gumbo is a cryptocurrency hedge fund dedicated to increasing investor Bitcoin holdings, paying dividends monthly, and only profiting when their investors do. All investments are managed 24/7 by crypto experts. To learn more about Gumbo and investing in Bitcoin, contact our team.