Crypto News Bites 2022/11/14
$450m FTX hack after filing for bankruptcy / $400m FTT tokens suddenly released / FTX claims Bahama account withdrawals only which regulators refute
Top News Summaries
FTX hacked for $450m after Chapter 11 filing, withdrawals only for Bahamian accounts, potential NFT money laundering, Bahamas regulators refute withdrawal claims, $400m of FTT tokens suddenly released, SBF built backdoor to bypass compliance, $2b of SRM token on balance sheet when market cap last week only $300m.
Exchanges release proof of reserves, Twitter accuses them of borrowing coins for snapshot, but turns out in one instance Crypto.com just ACCIDENTALLY sent $400m of ETH to Gate.io. Get your coins off exchanges, as “not your keys, not your coin”.
Ongoing Trends
Bankruptcy of 2nd largest crypto exchange FTX and contagion risks
Decentralization no longer just a tagline. Centralized to decentralized movement for remaining crypto traders / investors
Some Non-Fungible Token marketplaces not honoring creator royalty fees
Global crypto adoption and increased regulation, launches of Centralized Bank Digital Currencies.
Bitcoin mining industry consolidation as margin squeezed on low BTC prices and higher costs (electricity, funding, hashrate difficulty etc)
More details, news and analysis below!
Market Overview
Crypto markets continue to fall with BTC & ETH down 2.5% in the past 24h following more developments / revelations from crypto exchange FTX’s bankruptcy. This is despite equities & precious metals moving higher with USD falling after last Thursday’s lower than expected inflation numbers, and China finally looking to pivot from their zero-Covid policy. Not much respite for crypto as the full extent of the FTX fallout remains unknown, and investors derisked significantly as seen by the open interest for BTC futures dropping 20% last week to $9.5b. Potential catalysts are the G20 summit on Monday where US President Biden will meet with Chinese leader Xi, and US data such as retail sales on Wednesday & existing home sales on Friday.
Fat finger on the AXS perpetual futures on Binance? More than doubled in 2 minutes before settling down to +10%.
DOGE price remains strong, TSLA and now TWTR CEO Elon Musk went onto Twitter spaces during the FTX hack, and of his favorite memecoin he said “Doge to the moon”
GTBC plunges to a record discount 41.7+% to spot BTC as investors flee. In my view FTX made crypto adoption take a huge step back, and the whole space will shrink in the short-medium term.
FTX Drama Continues
Shortly after crypto exchange FTX filed for Chapter 11 bankruptcy last Friday (get up to speed in my previous newsletters), that very evening there was a hack that drained more than $450m from FTX. Kraken identified the hacker as he withdrew from his personal account to pay for commissions. Kraken has also frozen accounts owned by FTX and sister company Alameda. Reuters claims FTX founder SBF built a backdoor to allow him to move funds without alerting his own compliance team.
FTX said earlier that Bahamian accounts can withdraw funds due to local regulations. Apparently Bahamian accounts can also create NFTs on FTX’s NFT marketplace and sell it to a stuck user who buys the NFT with their full balance, and the account then sends funds thru to the user, most likely at a discount/for a fee. Whoever said NFTs were only good for monkey pics obviously forgot about money laundering.
And guess what? Bahamas regulators issues a statement refuting what FTX said, on how they have not directed, authorized or suggested to FTX to prioritize Bahamian clients. All funds subject to clawback.
About $400m worth of FTX’s token FTT materialized out of thin air. The locked tokens should follow a schedule where they are periodically unlocked and enters the circulating supply, but on Sunday 192m FTT tokens were suddenly released without warning. Crypto exchanges Binance and Huobi have halted accepting FTT deposits. FTT drops another 30%.
FTX’s balance sheet before the hack supposedly leaked. Plenty of doubt on their categorization of how liquid some assets are. “Less liquid” includes $2b worth of decentralized exchange Serum SRM when it’s market cap before last week was only $300m? Twitter claims that earlier in the year, FTX might have minted SRM out of thin air to prop up its balance sheet… twice. SRM price plummets 60%, the developers distancing themselves from FTX by forking the code, that is to copy the open-sourced code and creating a new protocol.
In other news, fugitives Do Kwon, founder of failed $40b blockchain Terra & the LUNA/UST tokens, and Su Zhu & Kyle Davies, co-founders of busted $10b crypto hedge fund Three Arrows Capital, appears back on the web on stream / Twitter. I guess they also know that the FTX/Alameda drama is so huge that what they did pales in comparison. Twitter does not believe their redemption arc or playing the victim stories.
FTX Contagion
Wrapped tokens on the Solana blockchain lost their peg as FTX/Alameda filed for Chapter 11 bankruptcy. SOBTC, which is a Solana token pegged to the price of 1 BTC, has lost its peg and only worth 0.13 BTC, as the wrapped token is issued by FTX but can no longer be redeemed for the full value.
CZ, CEO of crypto exchange Binance, warns of cascading crypto crisis. FTX shareholders, companies FTX invested in, funds and protocols who deposited with FTX, the fallout is far reaching and I’m expecting more announcements in the coming weeks. As an example, after the Terra blockchain imploded earlier this year, it took a few months to see the extent of the fallout. Paradigm is the latest investor to mark down their FTX investment to zero.
Multiple exchanges rush to provide proof that they have ample reserves, but Twitter alleges some exchanges are borrowing large amounts of ETH from each other just for the proof of reserves. Crypto.com CEO clarifies by admitting that they accidentally sent 320k ETH or roughly $400m to gate.io last month, which they have received back. Without the FTX implosion, crypto investigators may have never noticed this little slip up. By the way, this was the same exchange that erroneously sent $10.5m to a user instead of a $100 refund last year, which they didn’t notice until 7 months later. Their CRO token dumps almost 30%.
Hong Kong based crypto exchange AAX has suspended all operations including trading/withdrawal etc citing system maintenance. Perhaps it is just a poorly planned system upgrade.
At this point, I would rather be safe than sorry and have all my crypto pulled off any exchanges and into my own self-custodial wallet. As the saying goes, “Not your keys, not your coins”, and serious investors need to learn how to self-custody.
The move from centralized to decentralized has created opportunities (albeit in my near-term view a larger share of a shrinking pie). Decentralized perpetual futures exchanges such as DYDX and GMX have outperformed the general crypto market, with their token prices now back above pre-FTX levels, while self-custodial wallet TWT making new all time highs after CZ tweeted about it.
FTX fallout impacting NFTs. Chain XCN CEO Deepak.eth, collector of bluechip NFTs like CryptoPunks (Punks) and Bored Ape Yacht Club (Apes) is looking to auction off his collection. Apes saw a volume spike last week and prices fell from ~65 ETH to 55 ETH, while ETH prices fell 30%, while Punks fluctuated but unchanged at 65 ETH, reclaiming the throne of highest market cap NFT collection. My thoughts are this could show the difference in holder composition, where Punk holders are thought to be earlier crypto adopters while Ape holders may have only started looking at crypto this/last year, and thus not used to the price volatility.
Yuga Labs, founder of Bored Apes, saw a lot of concerns on Twitter on whether their treasury was stored at FTX or Blockfolio which was acquired by FTX. Yuga Labs co-founder says their ETH holdings were transferred to CoinBase providing the transaction id, which you can use to verify the transfer actually occurred. As the crypto saying goes, “Don’t trust, verify”.
Outside of crypto, in equities the crypto friendly US-listed Silvergate Bank (SI) fell 18% at the open last Friday before closing up 5% on the day, after announcing that they had no loans/investments to FTX, nor is FTX a custodian for their BTC collateralized SEN loans. In fact their relationship is limited to FTX deposits.
FTX’s implosion impacts politicians too. FTX CEO SBF was the US Democratic Party’s second largest donor. Just in time for the mid-term elections too, as his lobbying may have helped the Democrats retain control of the US Senate.
In a sign of reverse adoption… NBA basketball team the Miami Heat will look to rename the FTX Arena as they cut ties with FTX. The county signed a 19 year, $135m deal for the naming rights, and after an initial $14m payment, they were supposed to receive a $5.5m payment in January which is not happening now.
Regulation
Not a surprise that after the FTX collapse, speculation that regulation will sped up. White House already calling for more rules, while crypto exchange Coinbase CEO says US is behind other jurisdictions such as EU, SG, HK and AU, and advocates for the Digital Commodities Consumer Protection Act (DCCPA) which by the way FTX’s CEO SBF was the poster boy for.
Hong Kong takes “steady and cautious” approach to the development of the virtual asset industry, and to avoid scenarios like FTX through transparency and supervision. Given that they have only recently granted their 2nd virtual license since 2020, I believe regulation will be slow to come for the territory.
St Kitts and Nevis to adopt Bitcoin CASH as legal tender in 2023. Ticker is BCH not BTC. This was a fork of Bitcoin back in 2017 and is still in the top 30 coins by marketcap.
Other news
FTX news is just too big and takes up too much visibility, everything else is an afterthought. Interesting news that caught my eye today:
Glassnode shows BTC miners had the largest one day selling pressure since Jan 2021. This is likely due to the FTX news and I assume this trend will continue as more contagion news hits.
Flare token was either a scam in the first place or was exploited/hacked. About $17m was stolen and the price went from $18.25 to 0.0000018.
Metamask launches Bridges, a bridge aggregator to help users find the best route to move tokens from one blockchain to another.
Tokens Mentioned Today
BTC ETH FTT LUNA UST DYDX GMX TWT BCH
how low can we go?