Tech crash: it’s hubris time for crypto FTX exchange and Big Tech

Reaction subscribers are a sophisticated bunch but even those of you with some knowledge of crypto currencies and what’s known as Big Tech may be baffled by the extraordinary goings-on in these far-away worlds. 

Take the astonishing story of FTX, one the world’s second biggest and most influential crypto currency exchanges with more than a million users. With headquarters in the Bahamas, the exchange was founded and run by the young Sam Bankman-Fried who became one of the poster boys of the wild west dealing in cryptos. 

Just 30 years old, the curly-haired geekish MIT educated Bankman-Fried was being hailed as one of the country’s brainiest men and history’s wealthiest man ever. He was one of the biggest political donors to the Democrats – the second biggest individual donor to Joe Biden in the 2020 election giving him $5.2 million. Such was his ego, that even the Miami Heat stadium where the basketball team plays its home games has been renamed the FTX Arena.

On Monday this week, Bankman-Fried – or SBF as he is known – had a net worth of about $16 billion personally. This was down from $26 billion last year – and FTX  was recently valued at one investment round at around $25 billion. All good you might say. 

But by Tuesday, the fairytale was ending. The crypto tycoon had lost about 94% of his wealth overnight leaving him with $991 million. According to Bloomberg, it was the biggest one day collapse in wealth ever recorded even among billionaires.

So what happened? Well, from what we can glean, FTX suffered an overnight “liquidity crunch” after worried investors demanded to withdraw their money because of fears of a crash in crypto prices. As always in moments of such panic, the herd goes for the kill and this time the stampede of withdrawals has left FTX worthless. 

Enter SBF’s arch rival, Changpeng Zhao, the chief executive of Binance, who runs the world’s biggest cryptocurrency exchange. Zhao is said to have revealed on Twitter earlier this month that he wanted to sell his firm’s holdings of FTT, FTX’s crypto token. Zhao had received FTT’s as part of a sale of its equity in FTX in 2021. 

Binance’s Zhao is said to have published his tweet soon after a report from CoinDesk which suggested that most of the holdings of Alameda, SBF’s quantitative hedge fund, were held in FTT’s. His tweets seem to have led to a spiral of rumours which may have set off the wave of withdrawals from FTX with Bloomberg and TechCrunch reporting that any sale by Binance would have a mega impact on FTT’s price because of its small trading volumes, leading to a decline in the price of the FTT tokens and other cryptocurrencies. 

His tweets seem to have led to a spiral of rumours which may have set off the wave of withdrawals from FTX, made worse by reports from Bloomberg and TechCrunch suggesting any sale by Binance would have a mega impact on FTT’s price because of its small trading volumes. Then the next we heard was that Zhao was trying to put together a rescue package for FTX but pulled out at the last minute because the liquidity problems were too great.  

What we don’t know yet is whether this “liquidity crunch” – triggered by a rush of around $6 billion withdrawals from FTX – led to all cash outflows being blocked on Tuesday morning turning the collapse into an insolvency. However, there are suggestions that FTX had been investing customer’s deposits in illiquid assets, which may have forced SBF to opt for a fire sale or stop all withdrawals.

According to a report from Reuters, SBF sowed the seeds of FTX’s downfall months earlier because of mistakes he made after he stepped in to save other crypto firms as the crypto market collapsed amid rising interest rates.Reuters goes on to claim that some of the deals involved SBF’s trading firm, Alameda Research, which led to a series of losses that eventually became his undoing. In another report in the Wall Street Journal, FTX had $16 billion in customer assets but $10 billion was given to Alameda and nearly all of this has been lost.

On Thursday, SBF gave his own account of events leading up to the FTX implosion together with an apology for his handling of the affair, adding that the crash only affected the international arm of FTX.  

This is what he wrote: “I f***** up, and should have done better. I also should have been communicating more very recently.”  He went on: “A poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.” While it’s still not clear exactly what is behind the withdrawals which started on Sunday leading to Monday’s collapse of FTX, the venture capital firm, Sequoia, is under no illusions about what happens next. In a note to partners this week, Sequoia announced it has marked down its $150 million investment in the exchange to $0. 

While big venture capital firms with private backers such as Sequoia can perhaps afford to take the hit, other investors cannot. For example, the Ontario Teachers’ Pension Plan – which only last year invested around $400 million in the exchange (valuing FTX at $25 billion) – is also left with a worthless investment and will no doubt have questions from its pensioners to answer. 

Others who have lost millions include the US Bucs star, Tom Brady, who together with his ex-wife, model Gisele Bundchen, bought a significant equity stake only last year.  

SBF, who is now being investigated by the Securities and Exchange Commission as well as the Commodity Futures Trading Commission, also has stakes in Voyager Digital, the crypto lender that went bankrupt earlier this year, and Robinhood, whose shares have also been hammered since FTX’s collapse.

FTX’s problems have tipped over into the cryptocurrency market itself, with the godfather of crypto currencies, Bitcoin, falling nearly 10% to $16,775 after recovering slightly by today. But the cryptocurrency is used to big rallies and crashes having at its peak in October 2021 been worth $61, 374.  

The irony of course of the crypto bubble finally bursting is that cryptocurrencies – designed to be an alternative to conventional money backed by central banks, and as a way of making payments to cash or credit cards – have also been seen as a hedge against other more volatile assets. At the same time, those in favour of crypto-assets – popular with criminals and terrorists because there is no central regulator – argue that they are superior to currencies because there is no inflation and no central bank in control. But even cryptos can’t avoid bubbles. 

And nor can Big Tech avoid the bursting of an even bigger bubble. Over the last year the share prices of Silicon Valley’s Big Tech firms including Twitter, Apple and Meta have plunged to new lows. Shares in Meta – formerly known as Facebook – are now down on the year by 70% while those in Amazon are down 49%, Netflix has dropped 57%, Google has fallen 39% and Apple is down 25%. 

These Faangs – which have become the less appealing Maangs now that Facebook metamorphosed into Meta – are making cuts across the board from engineering to marketing, services are being slashed and more than 45,000 jobs have been lost over the last few months. 

Earlier this week, Meta’s Mark Zuckerberg went from virtual reality to reality when he admitted he had over-extended the business and would be firing 11,000 people out of a total workforce of 87,000. He was right to make such a mea culpa: Meta has taken on nearly 20,000 new staff over the last 12 months ahead of what Zuckerberg had hoped to be an advertising boom which never materialised.

Other firms such as Stripe and Lyft have also announced large-scale lay-offs, Amazon is freezing hiring in its corporate offices and Elon Musk’s Twitter has halved the workforce. 

Is Big Tech going through a shake-out even worse than the tech crash of 2001 because of the global economic slowdown? Or is there something else going on? The answer is a bit of both. Many of these companies – like Meta – have become too big and too fast. Zuckerberg, for example, is cutting back on his other businesses but not on his virtual reality meta verse dreams. 

Now they are also facing a new era of rising interest rates and higher inflation: a noxious mix that means investors are not so willing to fork out new funds because debt is no longer cheap. Big advertisers are no longer throwing big bucks at these firms as consumers limit their spending because of the cost of living crisis. 

What’s also interesting is that many of the engineers and IT experts who are being sacked by the big firms are not likely to be out of work. They are heading to work for the new start-ups and Small Tech.

  Another fascinating twist is that the Maangs are now being eaten up and taken to the cleaners by the new disrupters: firms like Tik Tok which is biting into Instagram and YouTube. Indeed, you could say the one-time disrupters such as Facebook and Google have not been quick enough to innovate so they are being disrupted by the new disrupters. About time too.

What’s clear is that the end of cheap money, the collapse of big tech’s crazy sky-high valuations and the unravelling of epic hubris in the crypto sector, all signal a proper old-fashioned tech crash.

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