The Generalist - The Casino and the Genie

Friends,

This has been a strange, depressing week. Anyone that follows the cryptocurrency space will know that the collapse of FTX represents a dark day for the industry, with likely long-running ramifications. My hope is that once the dust has settled, crypto can re-emerge stronger.

On a personal level, these events have catalyzed some reflections about FTX, and the state of crypto more broadly. Writing about the future, especially highly volatile sectors, reminds me again and again of this fundamental truth:

A lot remains unanswered, but for now, here are my thoughts on where we are right now.

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The Casino and the Genie

To the returning hermit, the man roused from a coma, the newcomer who decided now, of all times, to learn about the markets: in case you didn’t know – it has not been a good year for crypto.

Terra, Three Arrows Capital (3AC), Celsius, and Voyager have all collapsed; the sector’s market cap has crashed; and NFT trading volumes have shrunk to next to nothing. But amidst a year of bad weeks, this was the worst.

That’s not strictly true by the numbers. Over the past seven days, the total cryptocurrency market cap is down 20%, still short of the 26% fall in the middle of May.

But something deeper broke over the last seven days. On Tuesday morning, cryptocurrency exchange FTX announced it had agreed to be purchased by rival Binance. The news came after days of bickering between CEOs Sam Bankman-Fried and Changpeng Zhao (CZ), with the Binance CEO calling into question the financial stability of his rival’s empire. By agreeing to the sale, Bankman-Fried confirmed that CZ was correct, at least in broad strokes. As customers pulled out of the exchange, FTX was left with a hole it could not fill, one as large as $10 billion by some accounts.

On Thursday morning, the tune changed. Binance stepped away from the deal after taking a closer look at FTX’s finances and finding them even worse than it had imagined. The next day, Bankman-Fried announced he was stepping down as CEO, and that FTX and associated entities were filing for bankruptcy. Since then, rumors have swirled about a $515 million “hack” of FTX funds – which may instead be an inside job.

It is too soon to know exactly what happened. Bombshells seem to be dropping by the day, and crypto has a rare gift for making even the surefooted scramble. Whatever actual events unfold may not matter from a high level. FTX’s collapse represents a crucible moment. It is a crisis of faith for the industry and should force us to update our mental models aggressively. It is an opportunity to reflect on what crypto is, what it should be, and the vast distance between here and there. If it is not already clear, I say these things as much or more to myself as to the broader sector. Personally, this week has prompted a hard reset in how I think about crypto and the reasons I remain positive about its (maybe very) long-term potential.

So, what happened?

The edge

What seems indisputable is this: a company seen as one of crypto’s most impressive, innovative, and regulatorily proactive did something to leave it vulnerable to a bank-run-style crash. Right now, that something seems to have been lending $10 billion of customer funds to bail out sister organization Alameda. This was a company that attracted billions in funding from legendary investors like Sequoia Capital, bought the naming rights for an NBA stadium, scooped up battered lenders like Voyager, ran an extremely profitable cryptocurrency exchange, turned Tom Brady into a quippy advertising icon and Larry David into a Super Bowl smash, and attracted coverage from nearly every media outlet on the planet, including this one.

Those that have followed The Generalist for a while will know I considered FTX one of the most remarkable startups on the planet. Their growth and efficiency were mesmerizing: what rivals had needed years and thousands of employees to achieve, FTX had done in 18 months with an almost hilariously lean team. When I first wrote about them, they were on an $803 million revenue run rate and relied on just six developers. In Sam Bankman-Fried, they had a gigabrained CEO with the right blend of ruthless pragmatism and solid moral fiber. A consummate trader that had adapted exceptional systems thinking and an outsider’s ingenuity to turn crypto on its head – and with a sufficient horizon to recognize the importance of building a brand not only in mainstream America but in the corridors of D.C.

This isn’t to say that I didn’t see risks in the way that SBF ran his empire. In my very first piece on the company, I wrote:

In a meme

​​​​​​​​​​​For the pictorially inclined, here's the whole piece — all 4,600 words of it — in a single meme.

Puzzler

​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

The answer? The horizon.
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Wishing all of you a good rest of your day. Sending you my best, and may there be better days ahead in the crypto markets and beyond.

Until next time,

Mario