Editor’s Note: We’re just days away from the beginning of a new era for crypto…
As we approach a new administration coming to the White House, we also approach a radical policy shift concerning digital assets…
As Jeff says in today’s Bleeding Edge, the significance of this regulatory shift is like going from having a 100 mph headwind to a 200 mph tailwind overnight.
It’s an incredible time to get involved in the crypto industry. If you’re interested in hearing more from Jeff about this historic moment in crypto – and how we’ll profit from it – you can go here to automatically sign up to attend Jeff’s strategy session on Wednesday at 8 p.m. ET.
Today, they’re spoken of in the same breath.
Bernie Madoff – the largest Ponzi scheme in history.
Enron – one of the largest accounting frauds in history.
And Sam Bankman-Fried (SBF).
SBF and his team at cryptocurrency exchange FTX perpetuated one of the largest financial frauds the world has ever seen… one of the most remarkable – and notorious – events in the history of finance.
This month marks the beginning of the end of the FTX bankruptcy, which was declared on November 11, 2022.
The process of paying out creditors from the FTX bankruptcy begins this month.
For years, SBF was heralded by the press, the media, many in tech, and select politicians for his generosity, embodied by his adopted philosophy of “effective altruism.” He wanted to make as much money as possible with the stated goal of giving most of it away.
How noble.
Except it wasn’t.
SBF and his team were stealing their customers’ assets held on FTX. They appropriated customer funds on FTX and then sent them to Alameda Trading – a crypto hedge fund that SBF owned 90% of.
They then used those funds to afford a lavish lifestyle, to invest in startups, to purchase real estate, and to make political donations, among other things.
SBF’S $35 million penthouse in the Bahamas | Source: SDNY
The scale of the fraud is unbelievable.
Billions of dollars of customer funds were appropriated. The Department of Justice charged SBF with eight counts of fraud, money laundering, and campaign finance violations. The DOJ levied teammates Gary Wang and Caroline Ellison with similar charges, as well.
It seemed fitting that the executive who oversaw the $23 billion bankruptcy of Enron in 2001, John Ray, was appointed to be in charge of cleaning up the FTX bankruptcy. His words say it all…
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.
As the bankruptcy proceedings advanced, the numbers were staggering.
FTX owed its creditors $11.2 billion. Naturally, with a fraud this large, things didn’t end well for SBF. In March 2024, the Department of Justice sentenced him to 25 years in prison.
Caroline Ellison was sentenced to two years in prison. Her light sentencing was apparently due to her cooperation in providing evidence against SBF.
SBF’s first prison photo (tan shorts/black sneakers on the right) | Source: Tiffany Fong
The entire debacle was remarkable. But not only because of the scale of the fraud…
What made it incredible was the period in time that it took place… and who was backing the company at the time.
While it was an unpopular position then, many of us in the industry were skeptical.
“Effective altruism” felt like nothing more than virtue signaling. The political donations were also quite suspicious as they leaned heavily in one direction and appeared to “buy” access and support.
FTX also held the vast majority of its own cryptocurrency (FTT), limiting its ability to raise capital through sales of FTX without killing the asset price. And the tight ties with Alameda Trading and the lack of transparency were a major concern.
As an outsider looking in, without actually knowing what’s going on inside, we can only look for those red flags… the things that just don’t feel right.
There were plenty of them, and yet…
FTX was successful in fooling some of the smartest venture capital and private equity firms in the business. Firms like Lux Capital, Blackrock, Digital Currency Group, ICONIQ Growth, Tiger Global Management, Multicoin Capital, Sequoia Capital, Thoma Bravo, Pantera Capital, Lightspeed Venture Partners, New Enterprise Associates, Softbank, Temasek Holdings, and many more.
This is an incredible list of some of the most successful institutional investors in history. They had access to inside information through their own due diligence process. And in the end, they chose to invest almost $2 billion between 2019–2022.
What’s remarkable is that almost all of that investment happened during a period of intense regulatory scrutiny of cryptocurrencies and the blockchain industry during 2021–2022.
While some of the most legitimate, compliant blockchain companies – like Coinbase and Ripple – were suffering aggressive enforcement actions levied by the SEC, FTX seemed to escape unscathed.
SBF had direct access to SEC Chair Gary Gensler – he even bragged about it. He was able to facilitate meetings, which was something the rest of the industry struggled to do, no matter how proactively and professionally they engaged the regulator.
It was yet another warning sign.
The fall of FTX, when it happened, was quick.
On November 2, 2022, a popular industry publication leaked Alameda Trading’s balance sheet.
A few days after that, Zhao Changpeng, chief executive of Binance – which owned 23 million FTT tokens – announced the company would sell its holdings of FTT. After that, the price of FTT (shown below) collapsed to almost nothing.
It was over.
Price of FTT | Source: MIT Management
FTX went from a $32.5 billion valuation earlier in 2022… to almost worthless by November – in a matter of just a few days.
It reminds me of the common saying in investing: Markets take the stairs up and the elevator down.
Or, as Hemmingway quite succinctly put it in The Sun Also Rises (1926):
How did you go bankrupt? Two ways. Gradually, then suddenly.
Most creditors thought it was over, too. The sentiment was disastrous.
In these situations, creditors tend to get only a percentage of what they had invested back in the bankruptcy settlement.
And that’s where this drama gets really interesting.
The fraud itself had nothing to do with cryptocurrencies or blockchain technology.
In other words, the problem wasn’t the technology. It was bad actors – no different than those who have been committing fraud since the beginning of time.
Enron, Worldcom, Lehman Brothers, MF Global (formerly Man Financial), Theranos, and just about every investment bank has been caught red-handed.
But the fact that FTX was holding cryptocurrencies on its balance sheet is highly relevant to the outcome of the bankruptcy.
In fact, it’s the single reason that the creditors are being made whole.
It’s quite remarkable, really…
The reason this is even possible is that the value of those digital assets – the cryptocurrencies – increased significantly in value since the FTX bankruptcy. So much so that 98% of the creditors are projected to receive 118% of the value of their claims.
It’s natural to think that the creditors are elated to receive an amount above their claims – a highly unusual and positive settlement, considering this was a massive financial fraud resulting in bankruptcy.
But many are quite upset.
Why? Creditors are being paid back in U.S. dollars based on the price of their cryptocurrencies back in November 2022. But here’s the thing…
The value of those assets has skyrocketed since then.
Bitcoin alone is up almost 500% since then.
Had they been paid back in the cryptocurrencies they owned on the platform, their gains would have been much higher.
That’s what makes this case so unique. Like most other financial frauds that are carried out using fiat currencies like the U.S. dollar, the assets that FTX used were digital assets – cryptocurrencies – which is an incredible growth asset class.
If that wasn’t the case, the creditors could not have been made whole.
Coincidentally, this month is when the payout to creditors begins. In fact, the most important date for creditors is January 20th – the same date as President Trump’s inauguration.
That’s the date when creditors need to have completed all the tasks to receive their payments for the first round of creditor disbursements.
It’s as ironic as it is symbolic. In my 30+ years of investing in and working in high tech, I’ve never seen such a radical policy shift – 180 degrees in the opposite direction – as we’re seeing right now between the Biden administration and the new Trump administration with respect to digital assets.
Had all of these FTX proceedings happened in late 2022 or early 2023, I’m sure the creditors would have been elated to be making 118%.
But knowing what they know now, and knowing the Trump administration’s pro-crypto policy position, they’re outraged. And it’s easy to understand why…
Unlike most areas of tech, the blockchain industry – due to cryptocurrencies being used as an asset class to transact with – has regulatory considerations.
A combative regulatory approach can crush the industry, which is what we’ve seen for the last four years.
And a pro-innovation, pro-crypto approach to regulation will result in a thriving industry with investment and rising asset prices.
That’s why January 20th is so important and exciting for the blockchain and cryptocurrency industry. The significance of this regulatory shift is akin to going from having a 100 mph headwind to a 200 mph tailwind – overnight.
I was in Washington, D.C., last week researching and getting a feel for what’s coming. All I can say is that the feeling is electric.
We’re on the precipice of an incredible level of investment, growth, and asset appreciation like we’ve never seen before.
The stage is set, and we’re just days away.
Jeff
P.S. If you want to hear more about my research in D.C. last week and how you can potentially profit from the upcoming shift in crypto sentiment, don’t forget to sign up to attend my strategy session.
On Wednesday, January 15, at 8 p.m. ET, I’ll get into all this and more. Just go here to automatically add your name to the guest list.
I hope to see you there.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
