FTX’s Latest Chapter: 11

14 November 2022

😃 Happy Happy Monday!

US large-cap S&P 500 closed 0.92% UP ▲ Tech-heavy Nasdaq Composite closed 1.88% UP ▲ Pan European STOXX Europe 600 closed 0.09% UP ▲ HK’s Hang Seng Index closed 7.74% UP ▲ Japan’s Nikkei 225 closed 2.98% UP ▲


Musk’s Twitter: Risking Bankruptcy and Billions in Fines


FTX and SBF’s Latest Chapter: 11

📖   MoneyFitt EXPLAINS

🎓 Private Market Value


Well, Friday seems like an awfully long time ago.

The massive rally following lower-than-feared US inflation numbers on Thursday still had legs on Friday and saw the S&P 500 and tech-heavy Nasdaq Composite finish the week up 5.9% and 8.1%. Treasury prices rose and yields tumbled, with the benchmark 10-year yield falling from 4.2% last week to end at 3.8%. Hopes remain high(-ish) that the Federal Reserve would slow down the pace of interest rate hikes, and therefore avoid the prospect of a painful recession in an economy that has, relative to pretty much the rest of the world, been doing quite well, with a labour market that, for now, seems red-hot (amid some signs of weakening consumer sentiment.)

Meanwhile, China loosened its stringent Covid policies a little, shortening arriving travelers’ quarantines and those of close contacts of infected individuals, but officials said they were still stick “unswervingly” to the dynamic-zero-Covid policy overall. China and especially Hong Kong stocks kept their upward momentum and gave oil prices another boost.

And instead of a nice quiet weekend to recuperate from all the excitement, we had Musk. And SBF.

Musk’s Twitter: Risking Bankruptcy and Billions in Fines

“Twitter will do lots of dumb things in coming months. We will keep what works & change what doesn’t.” May not be quite so easy.

Elon Musk, boss of Tesla, Twitter, SpaceX and others tweeted that his companies “are well positioned heading into 2023” despite the risk of a slowdown, but reportedly warned some Twitter engineers that with net negative cash flow (actual money coming in minus actual money going out) of several billion dollars, bankruptcy “isn’t out of the question.”  

And in the email he sent to the remaining staff at Twitter ending remote work, Musk warned that “the economic picture ahead is dire” and that “without significant subscription revenue, there is a good chance Twitter will not survive the upcoming economic downturn” basically pointing to his intensely confusing and controversial on-again off-again $8 Twitter Blue (troll-)subscription service… all amid the weirdness of the off-again on-again grey Official check mark.

It’s bad enough that this led to a “massive drop in revenue” thanks to advertisers like GM, VW and Carlsberg pausing ad spend (since they don’t want their ads to appear next to extremist posts, something YouTube addressed in 2017), which is pretty much entirely self-inflicted. But Musk is losing people he needs but hasn’t fired. The heads of information security, privacy, compliance, trust and safety and advertising all quit in one day.

Trouble is that the Twitter Blue rollout skipped security reviews, which doesn’t just protect user data, but are required by a strict “consent order” signed as a settlement with the Federal Trade Commission, the US government regulator focused on consumer protection. This “has the force of law” and leaves Twitter open to “billions” in fines.


FTX and SBF’s Latest Chapter: 11

So what happened in the dramatic crash of leading crypto exchange FTX and its charismatic, shaggy young boss, Sam Bankman-Fried (SBF)?

Short version is this:

FTX, a major, well-respected crypto exchange with over a million customers, rescued its sister company, giant crypto trader Alameda Research, when it got into trouble. But FTX allegedly did it secretly with $10B of customer money in a loan secured against Alameda’s holdings of FTX’s own illiquid token, FTT. News of this set off a stampede of customer withdrawals from the exchange, which FTX could not honour which led to both FTX and Alameda declaring “Chapter 11” bankruptcy after rival Binance abandoned a rescue deal. $1-2 billion of customer funds have vanished and FTX is investigating a $473 million weekend hack, with regulators circling.Short and long-term implications remain to be seen.

Monday Geek-Out on FTX if you want a longer, but still very simplified explanation of the major moving parts. 
Starting point is that cryptocurrencies (like Bitcoin, among thousands of others) are still new, yet to gain broader acceptance and are highly volatile. They are essentially not (yet) regulated, and neither are the exchanges on which they trade… which means the exchanges have limited (or zero) oversight and investors have limited (or zero) protection.

1. Sam Bankman-Fried was a young MIT-grad trader at an established NY hedge fund who set up his own, very successful crypto trading fund called Alameda Research and made millions of dollars (including trading the Kimchi Premium)
2. Many exchanges have been set up to trade crypto, but SBF was unhappy with what was out there… so he set up his own in the Bahamas, which he called FTX with the tagline: “for traders by traders.” It now has 1.2 million registered users. A leading crypto exchange called Binance helped him and invested in the company shortly after (but later sold it back to SBF at a profit for cash and FTX Tokens.)
3. FTX has its own native cryptocurrency on the Ethereum network, the FTX Token (FTT) which was like a membership rewards system where traders holding their money in FTT get discounts of up to 60% on crypto trading fees on the FTX exchange and other benefits, but no ownership of FTX itself. FTX created the FTT tokens, but would also keep the price up by using some of its commission revenue buying them up and canceling them.
4. SBF raised a lot of money for FTX from highly regarded global investors such as BlackRock, Tiger Global, Sequoia and Temasek (…and Gisele Bündchen). He had an extremely high profile as the philanthropic, bean-bag sleeping, League of Legends-playing poster child of the industry, and perhaps the least-dodgy player in a still opaque industry, both in dealings with authorities (SBF was a strong proponent of regulation) as well as in the public eye through FTX’s branding.
5. FTX had a private market value 🎓 of US$32 billion when it got investors to pony up another US$400 million in January 2022. SBF was therefore EXTREMELY rich, with a net worth of US$24 billion at the start of the year and US$16 billion a week ago. Not bad for a 30-year old.

So what apparently (allegedly) happened:
1. The Crypto Winter: Rising interest rates led to riskier assets falling, including almost all cryptocurrencies. This led to many industry players going bust, including lenders Celsius and Voyager, stablecoins terraUSD and Luna, and hedge fund Three Arrows Capital. FTX stepped in as a saviour for a number of them, including Voyager and BlockFi.
2. But sister company, trading giant Alameda Research was caught in the carnage as well and blew a big hole in its assets, a problem as trades require assets to back them up.
3. SBF instructed his 53%-owned FTX to help prop up his 90%-owned Alameda Research by transferring money secured against Alameda’s holdings of FTT and Robinhood Markets Inc.
4. Trouble #1 the loan to Alameda Research seems to have included $10 billion belonging to FTX’s customers (which are not supposed to be touched) and #2 the amount of FTT used as collateral for this by Alameda was many many times greater than the amount of FTT usually traded (meaning it would be impossible to sell.)
5. And then CoinDesk on November 2nd published a story showing the too-close relationship between Alameda Research and FTX and that $5.8 billion of Alameda’s $14.6 billion in assets (and almost 90% of its net equity) were held in FTT.
6. Binance’s boss, Changpeng Zhao (“CZ”) then tweeted that he’d sell its $580 million FTTs, sending the price down 80% over two days and triggering a US$6 billion stampede of crypto withdrawals from FTX.
7. FTX is an exchange and custodian and if properly regulated and managed should be able to easily return whatever its customers ask for. It was not… since much of those assets were lent to Alameda. So SBF went looking for outside investors to plug the $8-10 billion hole. When rebuffed, he turned to CZ at Binance.
8. CZ agreed to buy FTX at a fraction of the January valuation subject to due diligence. A day later, having seen the FTX books, Binance abandons the deal, sending SBF scurrying to find $9.4 billion from investors. He fails.
9. A day after that, SBF steps down as CEO, apologises and declares bankruptcy for FTX, Alameda and other companies, leaving billions of customer assets in limbo, trapped in FTX’s digital wallets, or lost. His entire multi-billion dollar net worth is (apparently) vaporized within three days. The new CEO is the same restructuring expert who was brought in to clear up disgraced energy exchange Enron in the early 2000s.

10. Initial findings over the weekend are that $1-2 billion of customer funds are unaccounted for. And FTX has now moved all its digital assets offline while investigating an “FTX hack” involving over $400 million in crypto assets moved from the platform in “unauthorized transactions” in “suspicious circumstances”.

11. The SEC and the Justice Department are investigating FTX for potential securities violations. Any civil or criminal actions and where they would take place remain unclear.

“I was shocked to see things unravel the way they did earlier this week” – SBF. (So were we.)

Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.

📖 MoneyFitt EXPLAINS: Private Market Valuations (in the light of current activity in the 🤡-show that is FTX. “🤡-show” is the edited version.)

All weekend we’ve read how the “value” of the company that runs the FTX crypto exchange took under 36 months to get from $0 to $32 billion and barely 36 hours to get back to $0.

A company’s market value or market capitalisation in the stockmarket is the “number of shares times the latest share price” and it’s roughly the same in “private markets”, where a company raises money from investors when it’s not traded on a stock exchange.

When a private company raises money from investors, there is no share price to base it on so the new shares are offered to investors based on what it and its bankers think investors will pay. That’s the “pre-money valuation.” 

Say the pre-money is $100 million and investors invest $20 million in new shares, they will get 17% (i.e. 20/120) of the company, with a “post-money valuation” of $120 million since the money going IN becomes part OF the value of the company.

So the total $400 million that investors like Tiger Global, Softbank, Temasek and Ontario Teacher’s Pension Fund put into the company in January this year “at a valuation of $32 billion” got them a total of 1.23456% of the company’s “enlarged capital” between them. (What are the chances?)

They didn’t “invest and lose $32 billion.”

In total, VCs put in $1.73 billion of their investors’ money over three years, and whatever percentage of the company they ended up owning, the value of that $1.73 billion now seems to be at or close to $0. (Luckily for most of the managers of the VC funds, they still receive generous fees for their stellar efforts!)

Please do your own research – we create educational and entertaining content so you can start the day understanding the financial and business worlds a little better. However, this is NOT financial advice.

MoneyFitt (Spendolater Pte Ltd) is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. The information contained is not intended to be a source of advice or credit analysis with respect to the material presented. Any ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial, tax or legal professional and independently researching and verifying information. Content is intended to be used and must be used for informational purposes only.

MoneyFit Morning Archive (to 07-Nov-22)

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