So there it is, the moment many skeptics have always warned about. The crypto world is in a downward spiral, triggered by the bankruptcy of what was once the second largest trading platform FTX.
On Wall Street, there is a discussion about whether this is more comparable to the collapse of the investment bank Lehman Brothers in 2008, which had speculated with risky bets in the US mortgage market. Or is the FTX case more similar to the 2001 Enron bankruptcy, which involved accounting fraud? In this case, it’s probably a mixture of both. But in the end the answer doesn’t matter.
One thing is certain: the once successful crypto world will no longer be the same as before due to the bankruptcy of FTX. Crypto after FTX could look a lot like Wall Street after Lehman Brothers: Regulated, without massive ups and downs, boring.
This will be a painful transition for professional investors as well as small investors, programmers and entrepreneurs. But it is the only way out of this unprecedented crisis. It shows that the brave new world of blockchains and digital currencies is built on sand. All self-regulation initiatives in the crypto world have failed.
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Even well-known venture capitalists apparently didn’t look at the books before investing in the fast-growing crypto exchange. The prospect of high returns was too tempting and the fear of missing out was too great. Venture capitalist Sequoia, known for its early investments in Google and PayPal, invested $210 million in FTX. Private equity house Thoma Bravo put $125 million into Bankman-Fried’s project. For many, that was a seal of approval. They have now completely written off the investments.
Investors are withdrawing from bitcoin and ether
Meanwhile, the biggest crisis of confidence in the crypto world is unfolding. The central question: If the second largest stock exchange can go bankrupt within a few days – who is still safe? Investors have withdrawn $3.7 billion worth of bitcoin and $2.5 billion worth of ether, the second largest digital currency, from major exchanges over the past week, according to data from analytics house CryptoQuant.
“Gemini is based on trust, security and compliance” is the subject of an email that the exchange founded by the Winklevoss twins sent to its users on Monday to reassure them. Coinbase, the market leader in the USA, had previously sent a similar email to its users.
But the publicly traded company, of all people, reported an outage that lasted several hours last week when prices plummeted. So users didn’t get their money exactly when they wanted it most.
Kris Marszalek, the CEO of the crypto.com exchange, spontaneously made himself available for a question-and-answer session on Twitter on Sunday to reassure his users. “Withdrawals work as usual,” he emphasized again on Monday, there was no reason to panic.
Nevertheless, analysts are preparing for further domino effects. The crypto industry is too interconnected for the collapse of one of its biggest players to not have further repercussions. A number of hedge funds have already admitted in the past few days that large parts of their assets are now stuck on FTX.
The malice in the classic financial world is great. “The crypto industry has squeezed all the mistakes that the classic financial world has made over the centuries into a period of a good ten years,” summarizes the “Wall Street Journal”. Star investor Warren Buffett and his right-hand man, Charlie Munger, are often quoted these days. “Bitcoin is stupid and dangerous,” Munger attested back in 2018. For Buffett, the cryptocurrency was already “rat poison to the power of two”.
The big shortcoming: There are no central banks in the world of coins and blockchains, after all, the industry deliberately wanted to be independent of governments. The users, investors and employees of the crypto world have accepted this, sometimes even celebrated it.
But they now have to realize that a crisis of confidence can hardly be stopped without mechanisms for emergencies. The largest crypto exchange, Binance, has now brought a kind of bailout into play for projects that are “otherwise strong” but are acutely in a liquidity crisis, as CEO Changpeng Zhao announced. That’s a first step, but it won’t be enough to appease regulators.
A lot of innovation has yet to happen here to usher in the next phase of the crypto industry. The important players should have taken care of this long ago, preferably in the good times. But that didn’t happen. Now everyone is paying the price.
More: A child prodigy crashes, taking $220 billion with it – The lessons of FTX’s mega-bust