(October 11, 2023)
By Emmanuela Gioia Barbato, Senior Analyst
Edited by (Lorenzo Fruttero, Head of Equity Research)
A brief overview of the FTX fraud
A few days ago, the process involving the head of one of the most influential platforms for the exchange of cryptocurrency has finally started. In brief, he has been indicted by the U.S. District Court on money laundering, fraud, campaign finance violation and security frauds. Sam Bankman-Fried can be referred to as the ‘Robin Hood’ of the crypto market, he, who stole from his clients to fund private luxury items and elaborate advertising campaign by making political donations. After his release that costed only $250 million, $5 billion in assets have been recovered to cover his debts, yet they were not enough to suffice the total amount of assets missing estimated at $8 billion. Afterwards, FTX investors filed a further class action lawsuit for false representation and deceptive conduct.
How did the scheme work?
Sam Bankman-Fried oversaw two core businesses: FTX and a hedge fund called Alameda Research. The main business, FTX was a crypto exchange platform where investors could deposit their money and then buy Bitcoin, Ether, or other cryptocurrencies; FTX gathered so many investors that they even created their own digital token called FTT in May 2019.
Alameda apparently was a large client of FTX, that used the platform to trade digital currencies. According to prosecutors, Mr. Bankman-Fried allowed Alameda to borrow a virtually limitless amount of FTX and then channeled much of their investor’s money towards private purchases and matters. Among other things, Alameda used costumer funds to make large loans to FTX executives, who spent them on political donations; after all, where do you think the money offered to Donald Trump to retire from campaigning came from?
The scheme was possible because FTX and Alameda did not produce any balance sheet showing assets and liabilities since they were not private companies, neither they were audited. Otherwise, their lack in assets would have been exposed, showing the balance sheet listing $9 billions in liabilities and $900 million in assets, with poorly labeled entries showing a negative $8 billion balance.
FTX USD market cap (historical data)
2019-09-01/2022-12-31
Source: coingecko.com
The collapse of FTX
Between the late 2021 and the early 2022, while prices of Bitcoin began to decline, other cryptocurrencies followed, except for FTT which continued acquiring competitors. However, the rose-colored world of Sam Bankman-Fried collapsed after a CoinDesk article which highlighted the heavy dependency of Alameda Research and FTX, with assets valued at $5 billion. Binance, FTX competitor, proposed to buy the platform after the threat of mass withdraw by FTX customers; however, the deal fell through because of the discovery of mishandling of costumer’s funds and the intervention of U.S. Investigation, which made the scheme public.
Consequently, Finance announced a total sale of FTT tokens, which triggered a general withdraw. To cover the need of capital, FTX tried to sell assets but still couldn’t find the funds to suffice the lack of liquidity. Hence, they were forced to declare bankruptcy and many investors lost billions of dollars.
Are Cryptocurrencies making a comeback?
As many of the readers might know, after the news of the arrest and the general sale of assets happened in the late 2022, values had gone below $16.000. Although, in January 2023 Bitcoin has reached a value of $21.325. Based on CoinGecko, indeed, the value of the combined market of all cryptocurrencies has overstepped the $1.000 billions for the first time after the scandal at the beginning of November 2022. As a matter of fact, on Monday the value was up to $1.200 billion. The Bitcoin, the digital asset with the world’s highest value, has registered a growth of 27% since the beginning of 2023, while Ether, the second with the highest ranking, of 30%.
Bitcoin USD price (Historical Data)
2022-10-01 / 2023-10-06
Source: congecko.com
Moreover, the major index for growth might be represented by the increase of 4.6% of the S&P 500 since the beginning of 2023, while more data show a cooling down of inflation, which gives hope to investors for a possible loosing up of the Federal Reserve on the interest rates. That is, though, still a hypothesis.
A way out: AI technology
The TFX scam has brought to light how ephemeral and risky cryptocurrencies can be and how even the blockchain system can be hacked. But how is it possible to bypass the most secure and unbreakable line of codes? Easy, it all goes back to the most old and prehistoric of all forces: humans and their struggle to avoid selfishness, as Mr. Bankman-Fried showed. Nonetheless it is possible to see the light at the end of the tunnel: AI might be the solution to all investor’s doubts.
The blockchain system was designed to ensure a secure, transparent, and temper-proof applications, while AI technology assists humans and make efficient decisions. The combination of the two might be either a cutting-edge technology or the most efficient breakthrough since the introduction of the wheel.
By combining AI and blockchain, it is possible to create more secure and efficient cybersecurity systems for individuals, businesses, and governments, which is just the tip of the iceberg.
Bitcoin opening and closing price (BTC-EUR)
1NOV2022- 1OCT2023
Source: it.financeyahoo.com
Let’s call the shots!
Taking all there has been reported into consideration, we have many key points that must be highlighted. First, the trial against Sam Bankman-Fried is a further red flag that reveals how even the most secure and solid trading platform can turn out to be the exact opposite, which triggers mistrust in the crypto market. However, the enhancing of AI technology can only make us imagine what can be achieved by combining the blockchain system with a highly intelligent technology; more intelligent than even you and me.
Secondly, the Bitcoin is slowly starting to regain its value, apparently in an atmosphere with not so negative expectation for inflation rates. Although, investors feel adamant about trusting risky assets such as cryptocurrencies; as a matter of fact, Bitcoin still appears to be declining of 51% with respect to the same period last year.
Furthermore, regulations after the fraud have plaid a major role in aggravating the situation, as the government refuses to back any failure in crypto investments. Consequently, the most obvious investment would be financing AI Research, both for those who believe in the project and those who just enjoyed trading with cryptocurrencies.
References:
https://www.techtarget.com/searchcio/definition/blockchain
https://forbes.it/2023/01/17/cripto-mercato-torna-sopra-1000-miliardi-dollari/
https://www.nytimes.com/2023/10/03/business/sam-bankman-fried-trial-ftx.html
https://forbes.it/2023/01/17/cripto-mercato-torna-sopra-1000-miliardi-dollari/
Legal disclosure:
IMPORTANT: The projections or other information generated by BSTA regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. As such, BSTA does not assume any legal responsibility for actions that may have been taken by readers associated with any investment projections made by the members of BSTA. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
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