The “Bitcoin dead” gang is back and at it again. The downfall of FTX cryptocurrency exchange has revived those notorious pundits who once again blame the theft on the stolen funds, not the thief.
“We need regulation! Why did the government allow this to happen?” they shout.
For example, Chetan Bhagat, a famous author from India, wrote a detailed obituary on “cryptocurrency,” in which he compared the cryptocurrency sector to a communism that promised decentralization but ended up being authoritarian.
Perhaps unsurprisingly, his column aptly uses molten bitcoin
The logo as its distinctive image.
Bhagat should have chosen a more accurate image for his editorial (The Melting FTX
Token?), especially after looking at Bitcoin’s decade-plus history which saw it survive up to a nationwide ban. That includes 465,466 obituaries since it first appeared in 2009 when it traded for a few cents.
Bitcoin’s performance since its inception. Source: TradingView
The FTX/Alameda breakdown is similar to previous bearish trigger events such as Mt. Gox in 2014. Therefore, this failure of centralization will once again confirm what makes Bitcoin special, and why FTX is the opposite of Bitcoin and decentralization.
Moreover, the incident should also boost the growth and development of non-custodial exchanges for bitcoin which will help reduce reliance on the trust.
FTX may not have had zero bitcoins in custody
Traders have responded to the horrific collapse of FTX by withdrawing BTC from custodian exchanges. Notably, the total amount of bitcoin held by all exchanges decreased to 2.07 million BTC on November 17 from 2.29 million BTC at the beginning of the month.
US-based exchanges have seen the largest outflows, in particular, with users withdrawing more than $1.5 billion in bitcoin in the past week alone.
Bitcoin reserves on all exchanges. Source: CryptoQuant
On November 9, FTX halted withdrawals of all cryptocurrencies, including Bitcoin, raising suspicions that the exchange did not have enough reserves to meet demand.
That was most evident in FTX’s leaked balance sheet which showed the exchange held no Bitcoin for $1.4 billion in BTC commitments. In other words, FTX made it possible to trade fractional reserve bitcoin.
“This, on the one hand, is bad for you because you will only find out if they swim naked as soon as the stock market crashes, and you are accompanied by the loss of all your money,” wrote Jan Faustenfeld, an independent market analyst. He adds:
“On the one hand, this artificially increases the supply of bitcoin in the short term, suppressing the price and preventing the actual price from being discovered […] Yes, I know this is not real bitcoin, but as long as the exchanges are issuing fake notes, no Bitcoin is still in operation, and the impact is there.”
Thus, FTX’s little or negligible exposure to bitcoin makes it less likely that any remaining funds will be sold to increase liquidity.
The incident is also likely to create a new batch of Bitcoin traders by forcing people not to keep their funds in risky exchanges and to exercise self-guarding. While a lower amount of BTC on exchanges means fewer coins available for sale.
Sam Bankman-Fried was anti-bitcoin
FTX founder Sam Bankman-Fred (SBF) was the second biggest donor to Democrats after George Soros in the midterm elections, giving nearly $45 million to lobby for crypto regulations that would allegedly benefit his company.
Related: US Cryptocurrency Exchanges Lead Bitcoin Exit: Over $1.5 Billion BTC Withdrawals in One Week
But speculation is high that the SBF has tried to discredit Bitcoin’s growth through US lawmakers and news articles downplaying Bitcoin as an efficient payment system.
Other commenters have also pointed to a link between the SBF and anti-crypto US Senator Elizabeth Warren, noting that the father of the former, Joseph Bankman, helped the politician draft a tax bill in 2016.
SBF’s influence among US lawmakers has ended as he now faces possible criminal charges for illegally using client funds for FTX trades.
Press “F” to flow
Previous cryptocurrency market declines are due to the failure of the central players as well as the “altcoins” that eventually ended up taking over the money.
FTX’s FTT token is the latest example of this. Other failed projects that have dragged the market down this year alone include the Celsius Network (CEL) lending platform Divi and Terra.
Created and operated by centralized entities, the supply of these tokens, and thus the price, becomes subject to manipulation: pre-mining allotments, internal VC deals, small floats against the total supply, you name it.
It was exposure to such (nonsense) tokens, particularly in the form of collateral, that eventually drove crypto hedge fund Three Arrow Capital, FTX’s sister company Alameda Research, and many others.
“From our point of view, the cryptocurrency bubble that has emerged this year has been in the atmosphere of token B