Kryptodämmerung

Only weeks ago Sam Bankman-Fried was hailed as the J.P. Morgan of the cryptosphere, bailing out flailing crypto companies as the industry’s lender of last resort. Now he is the latest Crypto Icarus to have come crashing down to Earth.

SBF’s demise happened at the hands of his rival, Changpeng Zhao or CZ of Binance, who now reigns supreme as the undisputed overlord of the cryptocurrency industry.

While all analysis at this stage is speculative, the attack appears to have been straight out of the Art of War textbook. It will surely be the subject of business school case studies in years to come.

The supreme art of war is to subdue the enemy without fighting.

Sun Tzu

The great showdown started on November 6th when CZ tweeted that Binance would liquidate the entirety of its more than $500 million worth of FTT holdings.

The radio silence CZ’s thread was met with from the normally high frequency tweeting SBF was deafening.

The response from Alameda CEO, Caroline Ellison, that the hedge fund would happily buy back Binance’s stack of FTT @22$ was probably meant to inspire confidence. Instead it smacked of desperation.

At this point the game theorist SBF was caught in his very own prisoner’s dilemma with no way out. Which is somewhat ironic given that SBF and FTX had by all accounts already “betrayed” CZ by lobbying against Binance behind their backs, which CZ referenced in one of his follow-up tweets:

A political decision SBF may well come to rue now that he no longer has the lordly fortune to realize his political ambitions. He of all people must have known that betrayal does not lead to the Pareto optimal outcome in a prisoner’s dilemma? Or did he really believe he could betray Binance without CZ noticing? Or had he read too many of and started to believe all the magazine pieces hailing him as the crypto world’s infallible wunderkind?

More Madoff than Morgan?

The “recent revelations” in CZ’s tweet referred to the Nov 2nd Coindesk report about Alameda Research, which appeared to show that the majority of the net equity of SBF’s trading firm comprised of FTT and other SBF-associated tokens. The rumour mill went into high gear with questions about Alameda’s solvency.

Dirty Bubble Media accused the genius-declared SBF of running precisely the same business model aka ponzi scheme that doomed the crypto lender Celsius Network earlier this year:

Indeed, SBF had raised eyebrows with his cynical description of yield farming schemes on Bloomberg’s Odd Lots podcast back in April. Basically he said that it is little more than black boxes that purport to create money out of thin air. As it turns out it was a fitting description for his own business as well.

It is plausible that CZ was aware of this Achilles heel on Alameda’s balance sheet(?), despite his claims to the contrary.

Having sent out his foreboding tweetstorm all CZ had to do was to sit back and wait for the ensuing bank run on FTX — notwithstanding the collateral damage on the broader cryptocurrency markets.

On Nov 8th SBF was left with no other option than to fold his hand and ask for CZ’s mercy, after client withdrawal requests had clogged up and put FTX in a liquidity squeeze, while the tanking price of the FTT and other SBF-linked tokens had probably rendered Alameda de facto insolvent.

Denouement

The announcement that Binance will acquire FTX was perhaps more shocking than surprising. The deal is naturally subject to all sorts of due diligence. But even if FTX’s business retains zero intrinsic value, CZ has probably passed the point of no return and cannot backtrack now without inflicting even greater collateral damage on Binance and the cryptocurrency industry in general.

Even now questions are being raised if CZ has won a Pyrrhic victory. Has he become the Sun King of crypto at the cost of having shattering the industry in the process? It is a fair question. The price action of Bitcoin and Ether speaks for itself, not to even mention other altcoins.

A sense of despair, even among crypto industry stalwarts, appear to be widespread after recent days’ events. 2022 has seen the demise of many a crypto Demigod. But SBF was somehow believed to be a more noble soul. All the PR, Conversations with Tyler,  opinionating on effective altruism and political pontifications painted a picture of a statesmanlike figure. But as it turns out the substance was never quite what the facade of stadium naming rights, celebrity endorsements and Scaramuccian schmoozing gave the impression of.

Healing and Renewal?

One must assume that CZ takes the longer view and believes it is worth cementing his position as the industry leader of the future, at the cost of huge market pain in the present. It is a gamble, but a reasonable one. 

The risks are numerous:

  • The whole crypto space is likely to face intense regulatory scrutiny in light of the recent shitstorm — will CZ partner with the regulators like SBF did? Or more likely will he continue to take a more two-faced approach?
  • Will existing users even bother to hang around in the crypto hellhole after this Annus horribilis
  • What will attract new users to this hornet nest casino which almost makes the Turkish lira, the Argentine peso and the Lebanese pound look trustworthy in comparison, (though that may be to stretch it).
  • Crypto was supposed to be trustless. But in a good way, not like this, where it turns out nobody, not even the most well-reputed exchanges can be trusted.
  • And specific to the deal itself; will Binance be immune to contagion from the toxic company it is acquiring? Or can FTX create a black hole in Binance’s balance sheet which will bring down it as well? Or will it prove too difficult to get the deal completed?
  • Or will the deal go through and make Binance an overly dominant player in the crypto space?

Only time will tell. For now it all looks like doom and gloom. For all the pain and misery in the crypto space this year, the current market mayhem is a necessary cleansing process to root out all the bad weeds that have permeated the industry to its core. Whether CZ is the redeeming angel is another matter altogether. But perhaps like in the Twilight of the Gods, that once all the burning and flooding is done, it will lead to the renewal of the [crypto] world?

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