Is FTX’s recent cash infusion the 1907 moment in Bitcoin?
Sam Bankman Fried is currently bailing out every possible CeFi company. This begs the question if he becomes the central point of failure or the JP Morgan of crypto?
I know that I’m late to the party with this post. It’s been almost a week since the news about FTX’s big bailout came out. But I believe in quality over quantity.
This event is the perfect example of why you should always wait a bit before confirming the news on Twitter. The initial number of FTX’s bail-out with BlockFi was first rumored to be 25$ million. Most crypto people online freaked out and drew their conclusion, without any verification. This is very dangerous as it will impact the market.
Therefore I usually wait for a few days, draw my conclusion as well as research to get the facts straight. A shocking process in today’s clickbait world - I know shocking - however, this is how it should be done.
Back to the main topic for this article. Is this infusion of cash from FTX the 1907 moment of crypto? For those of you who don’t know what I mean by this, here’s a little history lesson:
The 1907 crisis, or how it’s often called ‘The Panic of 1907’, is one of the few financial crisis you very rarely read about. There were a few reasons why the crisis emerged.
One of them was the massive earthquake in San Francisco. Others were already unstable political climates in Europe. However, the main reason for the crash was the United Copper Company out of Montana.
The leadership of that company had the brilliant idea to short squeeze their shares to be able to pick them up on a cheap later on. Just before doing that, they would of course pump the stock. However, their math was wrong and the share price crashed.
One of the board members was also an influence at various banks and as loan collateral for their short, he had used his connections to get the banks onboard. Naturally, as soon as the price crashed, everyone wanted out. The company couldn’t pay their broker, had loans, and couldn’t pay back their loans. They eventually ended up filing for bankruptcy and brought a lot of banks down with them.
Why do you ask? Well, most clients and businesses at these banks heard of that downfall and immediately reacted to get their money out of the bank. The one thing banks are afraid of happened: A bank run!
People started to withdraw their deposits, and eventually, you found every bank out there panicking, as they weren’t able to give the money back. A bank is always lending out a big portion of the money it receives; this is how they create yields, earns its big bucks, and only keeps a small fraction on hand.
Usually, this kind of panicking and bank running causes inflation. Not enough money is in circulation; instead of money being handed out, it stays put. Back then, the FED didn’t exist yet. In today’s world, they would simply bail out the bank or increase the basis points to counteract inflation. We were still 6 years out from them being founded. So what did Wall Street do? They beat capitalism with capitalism!
The biggest names of Wall Street came together and arranged to save these banks from bankruptcy. Names like John Pierpoint Morgan and John Davison Rockefeller were the heroes at the end of the day. There was a lot going on with mergers of companies and trust companies, but that’s an unnecessary detail. JP Morgan, especially, was responsible for convincing the president and, therefore, the government to do it this way.
Funny enough, all these names are also the names who were in big favor of a Federal Reserve six years later. Why? The years after the bailout of these individuals and institutions were the ones calling the shot. The reason why JP Morgan and various banks on Wall Street these days have so much power can be pinpointed back to this moment in financial history.
OK, but what about FTX?
Now, the crypto market with all its players - namely exchanges, lenders, and marketplaces - is relatively young. However, players like FTX or Binance managed to take a big share of the market and are essential these days for millions of people. You could even go as far as saying that Sam Bankman-Fried could be the JP Morgan of the crypto world.
The main question is, whether these potential acquisitions of FTX have the same impact as the 1907 crisis. I personally think so, but let’s get the facts straight first.
FTX is currently closing a deal with BlockFi for $250 million. Which in itself sounds like a lot of money, however, if you look at the pure numbers, it’s clear that FTX is taking advantage of BlockFi’s current problems. They defaulted on Three Arrow Capital, had a tone exposure to risky DeFi protocols, weren’t able to pay back loans on time and there was the SEC fine of $100 million. Sure the current market situation doesn’t help but there were some misses in their risk management these past months.
The most current number for FTX’s bailout of BlockFi is $250 million. With that, they would be able to buy a pretty solid infrastructure on the cheap, position FTX even better in the borrow-lending market, and get a tone of customers with a simple check. (I’ve never bought a company for $250 million, so I don’t know if they’re writing checks, but for simplicity let’s say they do…)
There is not a lot of risk for FTX, as they acquire the company and have the chance to attract new customers and even hire great talent. BlockFi and mainly their leadership teams are the ones who’re going to lose a lot. Not only their reputation but also the trust of former clients, which is a big problem with these borrowing and lending platforms but that is a topic for another article.
If FTX manages to acquire BlockFi the main question for me will be, where they stop. Is it only going to be them or will they start buying the competition? According to the slogan: If you can’t beat them, buy them!
That scenario would be ideal for FTX, as they don’t seem to slow down. However, this would go exactly against the message Satoshi Nakamoto set out with Bitcoin. Whether you like it or not, Bitcoin is still the biggest name in the game and these fundamentals should the ones, the market operates by.
However, central institutions like FTX are not interested in a decentralized world, they’re interested in being the biggest instance in the crypto world.
Only time will tell, if this move will help the crypto space or if it will hurt us in the long run. Comparing it to the 1907 crisis again, we saw a massive depression years later and eventually landed in the year 2022 with a FED that’s not willing to raise basis points to counteract an incoming recession. I’m not saying that FTX will do the same with this acquisition, but there is a very strong possibility that years from now such events could happen as well. Which is something no one wants.
There shouldn’t be a central bank or institution in the decentralized world. Guidelines or regulations should be in place, but we should cherish the free and open market. After all, that market is what got FTX to the stage it is now.
Let’s lean back, and see where this merger takes us and what the future holds for all of us. With that in mind, keep stacking Sats and HODL on!