FTX is tanking crypto + Buy Now Profit…Never?
A quick fix of the latest financial happenings.
Good morning, investors!
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Without further ado…
Another Major Blow to Crypto: the FTX Crisis
FTX needs money, ASAP.
Why is FTX, a company that recently raised $400 million from an investor consortium led by Softbank at a $32 billion valuation, desperately seeking funds?
In case you’re foreign to the world of digital tokens, FTX is the fifth largest crypto exchange by volume, facilitating transactions and, in turn, helping keep the general crypto market liquid. Except FTX is now facing its own liquidity crunch after experiencing the crypto equivalent of a bank run. Last Sunday, investors collectively tried to withdraw $5 billion, a surge that continued until Tuesday when FTX suspended trading.
What spurred the fervid withdrawal rush?
First, a little context:
Sam Bankman-Fried is the billionaire owner of FTX, which he started in 2019. He also owns Alameda Research, a trading firm and effectively FTX’s sister company.
Changpeng Zhao is the billionaire owner of Binance, the world’s largest crypto exchange by far — Binance processes more volume (nearly $5 trillion) than the next seven largest exchanges combined ($4.6 trillion). Up until July of last year, Binance had an ownership stake in FTX worth $2.1 billion, but then FTX suddenly repurchased its shares from Binance for no apparent reason. Some have attributed the move to Bankman-Fried and Zhao having opposing views on crypto regulation.
On November 2, a CoinDesk report shed light on a critical weakness in the financial relationship between FTX and Alameda:
“[Alameda Research’s] balance sheet is full of FTX — specifically, the FTT token issued by the exchange that grants holders a discount on trading fees on its marketplace. While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. The situation adds to evidence that the ties between FTX and Alameda are unusually close.”
The report goes on to share that FTT represents a sizable chunk (almost $6 billion) of Alameda’s total assets ($14.6 billion).
“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token.” —Cory Klippsten, CEO of investment platform Swan Bitcoin, per the CoinDesk report
Not an ideal setup for a massive exchange. Four days later, Zhao liquidated $500 million worth of FTT and published the following tweet:
Coupled with the report, investors immediately lost confidence. Chaos ensued.
Almost Ironically, Zhao and Binance stepped in to acquire and rescue FTX, much like in 2008 when Bank of America swooped in to save Merrill Lynch from bankruptcy. Zhao signed a letter of intent and seemed to have saved the day, until Binance uncovered some red flags during the due diligence process.
Could the liquidation announcement and subsequent attempt at acquiring FTX have been a massive ploy by Zhao to take down a competitor? Maybe, maybe not. Regardless, the calamity prompted Bankman-Fried to post a lengthy, apologetic, self-deprecating, explanatory thread on Twitter summarizing what went wrong.
Reportedly, FTX is in a $9.4 billion hole. And as I write this newsletter, the scrambling exchange has reached an agreement with Tron for a special credit facility, which should help investors access their locked-up funds.
How has the ordeal impacted crypto as a whole? About as you’d expect — adversely.
Crypto’s total market cap shed roughly 20% of its value in less than a week, before recovering slightly.
Buy Now, Profit…Never?
Affirm released its Q1 earnings on Wednesday, and the results weren’t pretty for the Buy Now Pay Later (BNPL) provider.
BNPL has taken the payment world by storm, especially since its shown stickiness with younger generations. But, to date, it hasn’t proven to be a profitable service.
Although CFO Michael Linford proclaimed the company “delivered strong financial results again this quarter,” that sentiment appears limited to gross merchandise volume and revenue growth. Otherwise, Affirm’s operations are moving in the wrong direction — its operating loss grew by 73%, while its operating margin declined from an already unappealing -62% to nearly -80%.
BNPL allows consumers to buy things they otherwise wouldn’t purchase through periodic, usually interest-free payments. Under this business model, providers charge a fee to the merchants they work with, rather than the end consumer, in the form of a fee based on gross merchandise volume.
Perhaps BNPL is in growth mode as an industry, but its largest constituents have yet to sniff profitability — other public BNPL providers also routinely report heavy losses, such as Klarna and Afterpay.
Three Eye-Opening Tweets
And finally, we close with three eye-opening tweets.
We dropped the ball.
A bad year to be a Brady.
How to Lose
a Guy Billions of Dollars in 10 Days, coming to a theater near you.
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