Zhao saw that selling a large amount of FFT could cause its price to drop, in turn creating a liquidity crunch across Alameda and FTX. Bankman-Fried attempted to sell FTX to Zhao, but Zhao says the combination of the regulatory scrutiny FTX is currently facing and its ongoing liquidity issues have made a deal impossible.
Bloomberg reported that Bankman-Fried told investors the company would have to file for bankruptcy without a bailout and that FTX clients now fear losses. FTX’s capital shortfall could reach $8 billion ($12.5 billion).
It’s a pretty extraordinary story in itself, and one that has yet to unfold.
But it seems likely that FTX is worthless, or very close to it – which is bad news for the list of top investors in FTX, some of whom have helped the exchange achieve a valuation of $32 billion. ($49 billion) as recently as January.
Although FTX’s stock ledger includes two of the institutions that have become synonymous with the irrational scum of recent years, namely Japan’s SoftBank and US cross-fund Tiger Global, it has also attracted capital from some of the biggest names in global investing: passive investing giants BlackRock and VanEck, venture capital icon Sequoia and local giant Telstra Ventures, Singapore sovereign wealth fund Temasek and one of the Canada, Ontario Teachers’ Pension Plan.
Indeed, it wasn’t until September that OTPP chief executive Jo Taylor told Reuters he believed the fund had found the least risky way to play in the crypto space, by because of the role played by FTX in the market.
“In terms of risk profile, this is probably the lowest risk profile you can have since everyone is trading on your platform.”
Taylor told Reuters the investment would help OTPP know whether the risks and rewards of the crypto market were worth it.
“I don’t think we have the answer to that question yet,” Taylor said.
To be clear, the size of OTPP’s investment, which was made last year at a valuation of $25 billion, is likely to be miniscule in the context of its $242.5 billion portfolio. Canadians ($278 billion). Since Teachers’ must disclose all investments over C$200 million, it’s probably less than that.
Still, no doubt there will be polite discussion around the Teachers’ board about the wisdom of using the hard-earned savings of Canadian workers for experimentation.
(Sequoia Capital, which has rightly been mocked on social media for a flattering Bankman-Fried story still on its website, said Thursday it had not apologized for its $150 million investment in FTX.risk,” he said.
Fair enough. But surely an investor expects a very different level of risk from a venture capital firm compared to a pension fund.)
But surely the biggest lesson concerns understanding risk and how the notion of what is risky and what is not can change dramatically when the environment changes.
Eighteen months ago, or even early this year, investors who crammed into FTX fundraisers might have seen things the way Taylor seems to have seen it – a low-risk way to invest. in an inherently risky industry. Rather than being exposed to volatile cryptocurrencies themselves, these investors could own a key piece of industry infrastructure.
But what the likes of OTPP didn’t appreciate — or perhaps couldn’t see, given what the market has only confirmed about the Bankman-Fried intermingling of interests — is that FTX was very different from your garden variety scholarship.
Alameda, which actually founded FTX, also acted as a market maker on the exchange. And there are suggestions that Alameda was using customer collateral on FTX to fund its own investments; this seems believable given how quickly FTX was overwhelmed with liquidity issues.
Thus, the seemingly less risky investment – owning FTX as a crypto infrastructure – turned out to be just as risky as owning the crypto itself, for two reasons: FTX investors’ exposure to the FTP token and the unusual relationship between FTX and Alameda via Bankman-Fried.
The involvement of institutions like OTPP in a company like FTX is a reminder that the notion of risk can change rapidly when the external environment changes.
Like Howard Marks said this column last weekit often happens that seemingly safe assets are exposed like something else in times of crisis.
“Most things and especially new innovations, which have never been tested, can have a hidden flaw that is only revealed when the tide goes out,” he said.
For Australian super funds, which have rushed into riskier asset classes over the past decade in search of better returns – especially venture capital – the FTX episode should serve as a warning both on understanding risk and how risks are constantly changing.