It’s definitely been one of the craziest Novembers in the crypto industry witnessed by the majority of us so far. A few things that the article will cover are FTX collapse, the current state of the markets, and where they are heading from here.
Let’s start with the collapse of FTX, and how Scam Bankman-Fried, my apologies- ‘Sam Bankman-Fried’ went from being the darling of the crypto space, the savior of crypto, the genius with funny hair, the most generous crypto billionaire – I guess it was buying generous Bahamian properties for himself, close friends and family to one of the biggest fraudsters in the financial space.
It all started on November 2 when an article released by Coindesk , stated that SBF’s other business- Alameda Research trading firm had a lot of FTT token (FTT token is the native FTX exchange token, created by SBF itself) on their balance sheet. This raised a series of suspicions about Alameda Research’s solvency as the FTT token was created by the sister company, as $3.66 billion were unlocked FTT tokens that could not be accessed due to the vesting schedule. To add more fuel to the fire, other assets on their balance sheet were other illiquid altcoins that SBF itself co-founded or invested in the early stages.
This moment proved to be the ideal striking occasion for its biggest competitor CZ from Binance when he tweeted the intention to liquidate their FTT holdings. Arguably, this was the moment FTT token started its collapse and sent waves of fear across FTT holders, and speculators further pushing the price down.
Now, what happened after will go down the history of crypto, and financial markets as one of the biggest failures of corporate controls, and a complete absence of trustworthy financial information (John Ray III, newly appointed CEO of FTX, and insolvency professional) . To explain it in simpler terms I will try to summarize it in one single meme.
To put it clearly- contrary to mainstream media news, how they paint the narrative- of digital assets failed, and more regulation is needed, is a clear distinction to be made here. THIS IS CLEARLY A MALICIOUS ACTOR THAT COMMITTED FRAUD-IT HAPPENS IN HIGHLY REGULATED OR UNREGULATED MARKETS!!!
Recently SBF embarked on a publicity tour where he goes on different interviews and tries to carefully build a narrative where people will feel empathy towards him, and prosecutors will soften by not sending him to the prison where he belongs to. The narrative is the following: I was the super young genius kid that got distracted somewhere in my entrepreneurial journey, failed to properly manage risk, and somehow mismanaged $8 billion — I am deeply sorry for what happened. Now let me play league of legends and sit on my bin bags.
And to my surprise, he has a certain level of success.
Conclusion, and lessons to be learned from the FTX
- Not your keys, not your coins- It is so often said, but most of the time overlooked- people chose convenience over self-responsibility, and prefer to hold their net worth, or huge amounts of money in centralized exchanges that can lose, trade your funds, and go bankrupt. Decentralized exchanges are also coming with the risk of being hacked. So, the best options to hold your crypto, are cold-wallets, and self-custodial hot wallets-Trustwallet, Metamask, Phantom, and recommended to have possibly multiple wallets to reduce exposure to unforeseen risks further.
- Contagion risks are likely to stay elevated in the next 3-6 months with more bankruptcies to follow that could lower prices for digital assets even more. It is and will be a painful bear market in which many will throw the towel in.
- Our industry reputation in the short-term suffers, and regulators will probably use the FTX collapse as a reason to over-regulate, despite the human fraud that made it possible. Longer term this emphasizes the importance of DEFI, the smart contract that can be trusted if written correctly, and why crypto was born for the first time. There is still a chance that crypto will eventually get to where it needs to be, although chances are getting a little slimmer.
- Be more aware, and cautious of people posing to do good, promoting effective altruism- and behind the scenes operating a fraud. Of course, we do not know this when it happens, in retrospect, everybody is a genius, and wise after the FTX collapsed, however only a few ever raised suspicions related to SBF, and I was not one of them.
- Market downturns could last longer than many expect, as such, we should prepare accordingly. Invest in small sums, periodically, and only the amount you can afford to lose, and forget about it for longer periods of time. Do not speculate for high returns in short times as you will be disappointed!
The current state of the crypto space
While US equities have recovered in November on the back of inflation data-October reading came in at 7.7%, when the forecasted inflation was at 8%-sparked optimism in the markets and anticipates a possible slowdown in the FED hike in the December meeting, from 0.75 basis points to 0.50 basis points. A December hike of 0.50 basis points is already priced in the markets, and a smaller hike for example 0.25 basis points will bring more gains into the month of December.
The S&P500 closed up 5.4%, while the Nasdaq closed up 5.7% in the month of November thanks to weaker inflation data, and Jerome Powell’s latest speech-where his tone softened a little bit-despite remaining committed to bringing inflation down to the 2% range. It is interesting to observe how investors react to bad news but perceive it as good news. It is nothing good about 7.7% inflation YoY, major indicators point to a slowdown in economic activity in 2023, but somehow investors’ optimism is inexhaustible.
Credit impulse represents new credits from the private sector as a percentage of GDP and is considered to be one of the largest drivers behind economic growth. The chart below measures credit impulse for the three largest economies in the world, the US, China, and the eurozone. Sentix indicator that lags 8 months behind the credit impulse could decline significantly in 2023.
Forward leading indicators for the US economy entered negative territory, and every time that happened a recession followed in the next 7 months.
It is important to highlight that digital assets and US equity correlation declined given the specific crypto-related events- bankruptcies of FTX, Block Fi, and so on, and the crypto assets failed to absorb the positively perceived developments from equity markets for now.
Long-term holders and retail individuals who believe in Bitcoin, and what could it become do not fail to accumulate more of it. On 21 November Bitcoin addresses holding >0.1 reached an all-time high.
I know for many of you we are going through difficult periods in crypto assets, but in my opinion, this should pass too. I recommend extra diligence when investing in new projects and trying to stick with the veterans who survived the previous battles-Bitcoin, Ethereum is two of them. The more you detach from these two the more risk you take in your portfolio. I do not expect the bear market to be over soon. As soon as the FTX debacle will be properly digested, correlation will increase with US equities where the storm is not over. The FED is still committed to reducing inflation, interest rates will stay higher for longer, and major economies are going into slowdowns, thus a longer accumulation period will persist. Do not get caught in the first sizeable bounce and fool yourself that the bulls are back.
Have a good evening and take care of yourself!!
New to trading? Try crypto trading bots or copy trading