How FTX went from Hero to Zero in 24 hrs, and what can we learn from this Newsletter #10
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Hey online family,
as an entrepreneur, I can tell you that one of the worst experiences you can have been to see the castle you are building falling apart, and the ones who were on your side to move to the opposite corner and be against you, and Sam Bankman Fried is having now probably some of the worst moments of his career.
At the same time, as an investor, there is a very big frustration to see that the funds you have placed in a project in any of the possible forms are mismanaged, and the project fails to eat your money, the vision for that investment, your time, attention, and feelings. Yes, it is pretty bad. Two days ago, I was thinking about which project could be the next Celsius or Voyager, and FTX was on my list. Recently I launched a 12-month Mastermind About Investments in Web 3.0, actually, there are only two spots open for this group, get the full details here, and apply asap to get one spot, they will go in hours after this newsletter is broadcasted. The investment needed to be part of the 12 months mastermind is only about $5.5 a day, which usually are thrown away on a coffee & beagle or else. Some people are finding it expensive, but because they don't know what they are doing they perform really bad personal investments or keep their funds on one platform and lose insane amounts of money when they could get the support to navigate in a much safer way the Web 3.0 waters.
This newsletter is called Inside My Head - The New Entrepreneurship, so it always has my personal touch, what is exactly in my head, and how I see some things, so I would like to focus on the learnings from the FTX drama.
First, if you look at the header of this newsletter there are two Forbes covers hosting Elizabeth Holmes & Sam Bankman Fried, both of them being in disgrace due to the big fails of their projects. I love Forbes, but I can bet that these covers were purchased for a hefty cost from the money of the investors in these projects, not actually from the positive results of their operations. I love Forbes, they didn't do anything wrong, but for transparency, I believe that such magazines should have a disclaimer in the editorial section mentioning if the cover was object of a paid gig, and how much was the bill. Most people will not even notice but will help I believe with making big VCs less blind about obvious red flags. Of course, how I do things, I only judge myself, my work, my actions of lack of them, but here is an interesting case we can learn a ton from.
I believe that the entrepreneurs are the drivers to move the world forward, failure is part of the process, but there is a big difference between failure due to circumstances and crash due to bad practices orchestrated to seem legit to lure investors, users, clients, and other stakeholders.
By looking at these tweets which were the firestarter of the series of events leading to FTX's rapid default we have to understand the consolidated power of tweets sent to at least 7 million followers plus the ones from retweets by CZ which had two immediate efects:
Everybody has started to sell FTT, even if CZ said that they will liquidate the FTT tokens Binance had in the treasury over a period of 6 months. Due to the selling pressure the price went down 90%. A lot of the assets in the FTX/ Alameda balance sheet was in these tokens so the value plummeted. Were FTT backed by something? No, except the trust from the market, and the market price created by trading a small portion of the supply. Well, the crazy thing with the market cap of the projects is that if let's say the total coin or token supply of a project is 1 BN, and on one exchange monitored by CMC, Coingecko, and other aggregators are traded let's say 1 M, so 0.1% of the supply, achieving the market value of $20, this price multiplied with the whole supply will mean a market cap of 20 BN which (on paper) will make the founders multimillionaires or billionaires (they hold a % of the supply based on the project's tokenomics). But everything is on paper as the majority of tokens are not liquid, and the market can't absorb them.
Everybody has started to spread the panic message on Twitter, telegram, Discord, Whatsapp & in other social media channels, stating that FTX has potential liquidity issues, and based on the previous experiences with Celsius, and Voyager may suspend soon the withdrawals. So, a withdrawals frenzy has started until FTX was forced to stop them. Even a large bank which usually keep in the treasury around 10% of the deposits from the customers would be in deep liquidity trouble if all depositors will want to withdraw their funds by tomorrow.
As a result, FTX was brought on its knees, Binance started a non-binding LOI to potentially acquire FTX which was reconsidered the next day after the start of due diligence considering that FTX has mismanaged the customer funds. The internet is full of articles about all the details regarding the series of events, here I want to concentrate on the essence, and learnings.
After Binance dropped the intention of acquisition, FTX commenced voluntary Chapter 11 proceedings, the internet starting to be filled with information, and stories about FTX balance sheet, mismanagement of funds, and other elements. Everybody has an opinion, of course, but the truth is that there is a lot of money missing from the books, VCs are writing off their investments in FTX, and many users are crying about their funds, being added a new layer of lack of trust for the industry.
Slowly but surely, the humiliated "investors" who do zero homework and merely look at who else has coinvested before they sign the check, are coming out admitting that it's gone... all gone.
In a tweet late on Wednesday, venture capital giant Sequoia Capital said had written down the entire value of its stake in FTX, a little over $210 million.
“We are in the business of taking risk,” Sequoia wrote in a message to investors seen by Bloomberg. “Some investments will surprise to the upside, and some will surprise to the downside.”
Here is a list of the most prominent investors in FTX courtesy of The Block's Frank Chaparro:
BlackRock
Ontario Pension Fund
Sequoia
Paradigm
Tiger Global
SoftBank
Circle
Ribbit
Alan Howard
Multicoin
VanEck
Temasek
Remarkably, as ever more clueless pedigreed investors piled up to fund this fraud of epic proportions, the valuation went super parabolic, and after two early rounds in 2019 and 2020, FTX got its first real outside funding in July 2021 when it pocketed $900MM at a valuation of $18 billion in its Series B round; this was followed by two more rounds, the most notable of which was Series C when the valuation exploded to a staggering $32 billion. Sports stadiums followed, big declaration about donating wealth to charity, while there were signs that the reality is different than how things are portrayed with the use of large marketing budgets.
FTX is considered to have like 1% of the industry's trading volume so its collapse will not mean a lot, but still it has added to the wave of bankruptcies started in the summer and is forcing exchanges to show proof of funds reserved.
In such businesses the valuation is pure speculative, while they are not yet profitable, and can survive usually only if more funds are pumped. The project's tokens are bits on the computer which are sold for dollars, euros, BTC, or ETH which are highly liquid at any moment of the day or night. They are just promises in the future, but usually are not backed by anything.
No matter how great a platform looks, spread your funds into few of them as you don't know when something like this happen to the next victim in the industry. Also, no matter how good a token looks, showing a potential bright future don't put everything on them, stay diversified between assets, and asset classes, as there can happen many things where you don't have any control of.
This story is just unfolding, I will come back if will have interesting aspects to share. Please incorporate the learnings from this experience to become better, and enjoy the fruits of Web 3.0.
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All success, Adrian Niculescu