In May 2022, Terra Luna and UST, its stablecoin, failed.
By the time the dust settled in June, the crypto market had fallen 55%.
In July, I wrote that Terra Luna was the first shoe to drop in this Crypto Winter. And I warned that another would drop sometime this year.
Here’s what I told my Palm Beach Confidential subscribers in a special update… (Paid-up subscribers can watch it right here.)
I don’t know where that next shoe is going to drop. Being a betting man, I would suggest that there are either family offices − staking or lending platforms − that are sitting on gigantic losses, and they have not yet expressed those losses to the market.
So I would not be shocked to see another shoe drop… another well-known firm to come out and say, “We’re holding withdrawals and we’re shoring up our capital.”
In a scenario like that, what happens to bitcoin and Ethereum?
Bitcoin can see $18,000, no problem. Ethereum can go to $800.
Well, the second shoe has dropped… and as I predicted, it involved a crypto platform.
Until recently, FTX was the third-largest crypto exchange in the world, with a market cap of $9.7 billion at its peak.
The company even paid $135 million in March 2021 to put its name on the home court of the NBA’s Miami Heat in the FTX Arena.
FTX is a private, Centralized Finance (CeFi) company. And like other centralized crypto firms such as Celsius, Three Arrows Capital, and Voyager, I expect more of these CeFi companies will go belly-up before this sell-off is over.
Greed Is Killing CeFi
CeFi companies act as financial middlemen in an exchange…
They enable others to buy and sell crypto and use blockchain Decentralized Finance (DeFi) protocols to make banking, borrowing, lending, and investing easier and cheaper.
I won’t get into the weeds on how it works, but it allows users to trade billions of dollars in assets without human intervention.
But the protocols aren’t the problem. Many DeFi applications have continued to work flawlessly.
The problem is the lack of transparency in centralized finance firms.
Unlike decentralized protocols such as Uniswap and AAVE, which have 100% transparency, there is no way to tell the amount of speculative, leveraged bets centralized companies have made.
As a result, private CeFi companies like Celsius, Three Arrows Capital, and Voyager went bankrupt… And others, like BlockFi, also have exposure to risky leverage.
FTX is just the latest victim of CeFi greed. A recent story in the Wall Street Journal suggests that FTX was lending out user funds to its sister company Alameda, a crypto trading firm.
This was in direct violation of FTX’s explicitly stated terms saying it wouldn’t lend out customer funds in any way, shape, or form.
Things started to unravel for FTX when a report showed that 40% of Alameda’s $15 billion in assets were in the form of FTX’s native coin called FTT.
So, why is that a problem?
Well, when you back up to 40% of your assets with tokens you essentially printed out of nowhere… folks get a little worried about the value of your collateral.
On top of that, reports suggest Alameda had taken out lines of credit against those assets and engaged in levered trading against them.
This opened up FTX and Alameda to attack.
Once the rest of the industry saw how dependent Alameda and FTX were on the value of the FTT token, traders shorted the token to force a cascade of margin calls…
That would force Alameda to liquidate its FTT holdings, enriching the short sellers.
Things started to get really crazy when Binance – the biggest offshore crypto exchange in the world – threatened to sell about $500 million worth of FTT tokens.
Binance CEO Changpeng “CZ” Zhao compared FTT to the failed LUNA project… after the news broke, FTT crashed 83% in just two days.
This action caused a rush to the exits for traders with cash sitting on the FTX exchange.
Unlike a bank, when you put money onto a crypto exchange, your money is held separately from the exchange’s money.
So FTX should have been able to process the withdrawal requests without issue… But that’s when things took a particularly nasty turn.
After processing $6 billion in withdrawal requests, FTX closed its withdrawal function.
That’s when the crypto world realized that FTX was playing fast and loose with customer funds.
Unable to secure more funding from his venture capital backers Sam Bankman-Fried, the majority owner of both FTX and Alameda, did the unthinkable… he reached out to his mortal enemy, CZ.
CZ offered Bankman-Fried a tentative lifeline saying he would bail them out, dependent upon doing more due diligence… but that didn’t happen.
This past Wednesday, November 9, CZ backed out of the deal, stating, “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
Further reports from the Wall Street Journal suggest Bankman-Fried’s firm FTX is facing an $8–10 billion shortfall in customer funds.
Now, there are two key takeaways here:
First and foremost, this is not a crypto problem. It’s a greed-based corporate governance problem.
It’s the same type of fraud and greed that took down commodity broker MF Global in October 2011, when a series of risky bets made with customer money took it into bankruptcy.
At that time, no one suggested that the world stop trading commodities… Yet, I suspect global regulators will attempt to use FTX’s collapse to pass sweeping laws that seriously inhibit our ability to trade crypto.
The second lesson is that you don’t store your coins on an offshore exchange.
Self-custody of your assets is one of the greatest gifts Satoshi Nakamoto gave us when he invented crypto with the creation of Bitcoin.
To ignore that gift is to invite financial disaster upon yourself.
Where Are We Now?
Many in the crypto sphere are calling this the “capitulation” event that surely must mark the bottom of the crypto bear market.
In my opinion, that’s a mistaken belief. We still have no idea how much damage will be done to FTX’s and Alameda’s counterparties.
We also can’t ignore the ongoing implosion of bitcoin miners.
This matters because miners have taken out billions of dollars in loans to keep their operations above water… And many of these loans were backed with bitcoin and other crypto assets.
When the miners and lenders are forced to sell their crypto, we’ll see more margin calls, forcing even more selling.
Now add in FTX, Alameda, and all the other counterparties that use crypto leverage, and we have the potential for another massive wave of forced margin selling.
This suggests that the bottom is not in and that we will most likely see Ethereum (ETH) trade to $800 (or lower) and witness bitcoin (BTC) trade to $12,000–15,000.
Let me repeat that many, many more firms will face bankruptcy in the coming weeks and months. One firm I am concerned about in particular is BlockFi.
That’s why I recommended my subscribers move their assets off BlockFi, another CeFi lender, this past week. (Paid-up subscribers can read the update right here.)
Now that I told you the problem, it begs for a solution.
And the good news is that it’s a simple one…
True Capitalism at Work
Three Arrows Capital, Voyager, Celsius, and now FTX all collapsed due to greed.
Greed is part of human nature. And we see it rear its ugly head in every asset class.
And as I’ve said before, the solution to pure greed is pure American capitalism.
If a traditional financial firm went bust overnight as FTX did… it would cause so much chaos in the markets that the Federal Reserve would have no choice but to intervene.
Every lawmaker in the country would be demanding new regulations… And the media headlines would be screaming for blood.
But in crypto, there’s no one to rescue you.
No Fed to cut rates to boost your market cap… No SEC to settle disputes. And no Congress to bail you out.
If you don’t run a good business, crypto will destroy you. If you are stupid enough to use massive leverage on assets that can drop 80%, crypto will destroy you.
That’s what happened to Bankman-Fried. He went from a net worth of $15 billion to $900 million literally overnight.
That’s the unforgiving nature of this asset class. People vilify crypto for its volatility… but that’s a mistake. Its volatility is the sharp stick that forces good behavior upon its participants.
It’s unparalleled capitalism. The type of capitalism that built America, where you can’t run to your mama to bail you out if you’ve been an idiot.
While all of this works itself out, be prepared for a lot of negative press. Be prepared to see regulators target crypto projects. And for centralized players, I expect much more regulation.
Friends, what we’re witnessing is capitalism at work. It’s like a wildfire that clears a forest of underbrush.
Once it burns through the rubbish, the fraudsters, and the idiots, the green shoots eventually sprout back up.
And you will see a stronger, smarter, more conservative crypto ecosystem spring up to replace the current cowboy culture.
It’s not pretty… but I want you to view it as an opportunity.
With bitcoin below $18,000, I’m ready to buy more… And if it falls between $12,000 and $15,000, even better.
Just remember, be rational, and don’t invest more than you can afford to lose.
Because when the dust settles and CeFi greed has run its course, the strongest, truly decentralized projects will be left standing…
And those names will grow to dominate the financial landscape of the future.
Let the Game Come to You!
P.S. If you think the collapse of FTX and Three Arrows Capital seems familiar, that’s because it is.
In 2008, Lehman Brothers went from being the fourth-largest U.S. investment bank… to one of the largest bankruptcies in history, with over $600 billion in debt.
And like FTX and crypto, the effects of the Lehman collapse were felt in the market long after it closed its door.
Today, I see a disaster forming in the stock market… one that could be 155x larger than the Lehman collapse… and one that will destroy the financial future of investors worldwide.
That’s why I’m holding a special briefing next Wednesday at 8 p.m. ET.
I’ll tell you about this Next Lehman, and I’ll even share a pick from my “2023 Recession-Proof Portfolio”… all absolutely free.
Friends, the reckless greed we’re seeing today will never go away… So the best thing you can do is prepare for what’s ahead.
Join me next Wednesday to find out how… Click here to automatically reserve your spot.