No One Too Big to Fail

What a span of three weeks we’ve had in the financial markets. What was just a dismissed rumor a couple of days ago (Is FTX in Trouble?!) became a reality today as FTX was “rescued” by Binance. (more on this later) This event has shaken Crypto to the core because it’s become clear that no one is “too big to fail” because no one is coming to the rescue. Is this Crypto’s “Lehman Moment” like the 2008 event that precipitated the stock market collapse? 

Is This Crypto’s “Tech Bubble” Moment? 

I have been comparing Crypto to the 2000 Tech Bubble for years because I see so many similarities. All of those great tech companies that print tons of cash out of thin air every day took a while to get to that point. In 2000 very few of them had any actual profits to show for a fancy dot com web address and a slide to get to the first floor in their headquarters. (yes, I’ve slid down one) That fact was finally exposed beginning in 2000 while Tech was left at the curbside and the economy embraced stocks that drove the military industrial complex as the US built up for the next war. 

It took Tech almost a decade to let the dust assemble from the curb to where it could be built into those profitable behemoths that we know as GOOGL, META, AMZN, NVDA, MSFT, AAPL, etc. And what finally came out of that mess were some incredibly strong, profitable companies that drove innovation (and profitability) to levels never before seen. 

In many ways, this could indeed be the Lehman Moment for Crypto. 

No More Crypto Bros

“But Wait!” you might be saying, “This is my generation’s technology! We can’t let Crypto die!” Well, we all thought that pets.com was a cool idea in 1999 but not if it could not be run at a profit and offer value to customers in the meantime. 

The death of FTX has to mean something. It has to mean that you CANNOT play around with your customer’s capital. It has to mean that you cannot YOLO your customer’s money. Why else would anyone use an exchange other than to just dump your coins on an open market if your capital is at risk? I used to think the “not your keys, not your crypto” battle cry was a little overdone, but we’ve seen two major exchanges get blown up and perhaps more to come, if they are not adequately backstopped against risk. 

Crypto must GROW UP and start providing tangible value with each project. Companies cannot be backstopped by their own coin, any one of which can go to zero. 

Winners and Losers

Who are the winners and losers of this event? 

CZ and Binance stand to be big winners IF the FTX numbers are solid, otherwise they will pass. There is some discussion today that Binance will walk away from FTX period. 

Traders stand to be the big winners of this melt-down if they can find ways to leverage changes in value, especially through derivatives like futures and options. 

Buy-and-Hold investors stand to be the losers in the short run as there is no viable support at these levels, and we might have to see the 2020 breakout levels tested. 

All sorts of Hardware and Cold Storage wallets might become winners in the short run due to the oncoming run to get assets off of centralized exchanges. 

Some of the more “traditional” exchanges like Coinbase, Kraken, and Gemini might be winners in the short run if they can speak to counter-party risk measures.