13th November 2022 > > FTX fallout.

tl;dr

Beware the fallout from the FTX fiasco.

Market Snap

Market Wrap

Perpetual futures funding rates remain elevated to the short side as the bad news keeps rolling in, this time a reputed $600mm “hack” of FTX reserves. With most of the senior management under supervision in the Bahamas – who have an iron clad extradition treaty with the US leading directly to decades in jail – only Caroline Ellison (see below) appears to have escaped for now.

Curious Cryptos’ Commentary – Crypto.com

The collapse of centralised cryptocurrency exchange FTX – and its sister firm Almeda Research, a hedge fund whose assets were illegally sourced from FTX’s retail customers – has been painful for crypto markets.

However, I do think it is important to keep a sense of perspective.

The core problems at the heart of the FTX fiasco are leverage, correlation risk, and outright theft, compounded by a devastating lack of experience in the senior management team. (*)

These are not problems created by cryptos per se. These are problems that have forever dogged business and finance. Regulatory scrutiny of centralised operations like FTX is the simplest mitigating initiative that we need right now, with the US and the EU leading the charge in that respect.

…

History teaches us that the collapse of previously trusted companies can lead to a domino effect. The examples in TradFi are legion but, as we saw just earlier this year, the collapse of Terra and LUNA took out Voyager and Celsius, and I suspect that at that time some other leveraged players were a little concerned about their own solvency too.

It is possible that Crypto.com might become collateral damage to this latest fiasco.

…

For the record, I have no axe to grind about Crypto.com.

And perhaps I am being a little unfair to focus on this one centralised cryptocurrency exchange. But I hope that after I have explained my concerns it will help you to focus on some of the risks that might affect you.

…

Crypto.com has taken the initiative to publish the allocation of its crypto assets.

And that is laudable.

But I suspect it might backfire:

With nearly $3bn of assets, 20% of them are in SHIB (Shiba Inu), one of the many meme coins launched just last year. SHIB is a crypto with no real value proposition other than it has a cute dog as its profile picture.

That is a red flag.

But whilst the popular press is impressed by this transparency shown by Crypto.com the contrarian in me cannot help but look at this in a totally different light.

Crypto.com has not declared any information regarding its liabilities.

At the minimum those liabilities are customer deposits, and I would be very surprised that a 20% allocation of assets to SHIB accurately reflects the makeup of those deposits.

There is zero information about its borrowing arrangements, and the collateral posted against those agreements.

There is zero information about leverage ratios.

There is no insight to the important part of the balance sheet – what does the company owe, what are the carrying costs of that debt, and when, and under what circumstances, does that debt need to be repaid. These are the questions that need answering to try to understand the solvency or otherwise of Crypto.com.

…

Once again, we see the twin risks of leverage and correlation raising their ugly heads, made far uglier by acting in concert.

This PR campaign of transparency about its assets by Crypto.com signally fails to address these issues, which makes me worry that the real reason for this apparently innocuous disclosure is that Crypto.com is also on the verge of collapse.

Maybe that is not the case, but do you want to wait to find out when it might be too late?

If you are a user of Crypto.com – or any other centralised exchange – move a minimum of 90% of your crypto assets into self-custody, preferably using a Ledger Nano X. Do it now.

And to paraphrase a famous statement, that really is investment advice, for the first and only time in the pages of the CCC.

…

(*) If you wish to disagree with this statement, you should first look at this interview with the CEO of Almeda Research, Caroline Ellison, who was allegedly in a relationship with the CEO of FTX, Sam Bankman-Fried:

https://twitter.com/i/status/1591137605613408256

What she is saying in this interview scares the pants off me.

And that’s without considering that her glasses have just one arm on the left hand side.