Tuesday’s blowup of crypto exchange FTX—run by wunderkind Sam Bankman-Fried, who once boasted that he could spend $1 billion on the 2024 elections—was inevitable. My beef with the crypto market has always been that it is backed by nothing but air. At any moment, that support could disappear. For FTX it just did. FTX sister company, Alameda, had been making loans against billions in an FTX token known as FTT, which traded last fall near $80 with a value of over $9.5 billion. On Monday it was $22 amid concerns that a leaked balance sheet showed excess leverage. Now it’s hovering around $3. No wonder FTX has liquidity problems. The fall happens fast. FTX agreed to be acquired by rival exchange Binance, the world’s largest, though Binance indicated Wednesday the deal was off.
Only four months ago, Mr. Bankman-Fried said that the worst of the crypto crisis was over and that FTX had a few billion dollars to bail out failed crypto companies. I guess not. Binance could afford to buy FTX because Binance is backed by its own token, BNB, which was worth $106.5 billion last fall, though now is worth only $45 billion. Is that crypto’s last $45 billion for bailouts? Bubbles collapse when no one else buys in. Coinbase, whose stock is down almost 90% from its initial public offering, and other exchanges may not have the heft to bail out too many failed crypto ventures.
So what backs BNB? I’m not privy to Binance’s balance sheet or income statement—one of the reasons tokens should be classified as securities, so investors can know what they are holding—but my guess is that the Binance token is held up by the same magical forces as FTT, nothing.
It has been only six months since the “algorithmic stablecoin protocol” Terra, tied to the Luna coin, blew up. They were held up only by hype. Then one day the bellows stopped pumping. This wiped out $80 billion in value, whacking some hedge funds and lots of individuals, neither savvy enough to see the bubble.
The dollar and Treasurys are backed by the good faith of the U.S. government via its income-tax-generating ability. When stocks sell off, they eventually find a bottom so long as they are viable enterprises that can eventually make money. Real-estate loans are backed by the value of a home or building, but crypto has no backing.
And the heat is on.
