The final price of crypto could be zero. There aren’t many leveraged buyouts of tech companies, and for good reason. Technology and debt don’t go together like Red Bull and milk. Why? Because when technology works, people pay a lot for it. You can’t LBO Google. When technology advances, there are few assets and collateral left to pay off debts. FTX, Musk, and SoftBank are learning this.
The last time Twitter made money was in 2019, and it now has to pay back $1 billion in debt every year. Wall Street can’t sell Twitter’s buyout debt, which is now worth maybe 60 cents on the dollar, without losing money. Mr. Musk even told his employees that the company could go bankrupt. He has, of course, made money by selling his own high-valued (but falling) Tesla shares. Most recently, he sold another $4 billion worth of shares, bringing his total earnings to more than $19 billion. As Chief Twit, Mr. Musk says that Twitter will be based on the idea of free speech. Advertisers are fleeing. So are employees.
whose FTX and Alameda companies fell apart, is the new face of the dangerous mix of technology and debt. Sure, these businesses stole, to put it nicely, their customers’ property. bank-run-like withdrawals forced the company into Chapter 11. The company’s first mistake was borrowing money using its FTT token, which was only held up by air.
This was crypto’s big lie to the public. Because there wasn’t much trading in FTT, FTX could set any price it wanted, but not forever. FTX and Alameda took out loans against tokens they were manipulating themselves, such as Solana and others. These tokens were once called Sam Coins, but are now called Scam Coins. The fatal mistake was that they thought FTT would stay high forever, so they put their money in investments that were often hard to get out of. Even employees, vendors, and anyone else who would take it were paid in FTT tokens. These tokens used to be worth almost $10 billion, but now they are worth only about $400 million.
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You can’t always control something. Delusion is eventually replaced by reality. Just touching a pin to the bubble did the trick. When Coindesk leaked a copy of Alameda’s balance sheet that showed a lot of FTT tokens, Changpeng Zhao, the CEO of Binance, started selling. In just 48 hours, the FTT went from $22 to less than $3. So much for security. When the dust settles, FTX/Alameda may still owe $8 billion to $15 billion and have little to sell to pay it back. Sorting out who gets what will take years.
At the same time, others came rushing in. A cottage industry of companies grew up to take advantage of crypto. When this happened, things got bad. The first step was to get customers by giving them interest on their crypto. The Anchor Protocol, which was behind the Terra-Luna algorithmic tokens that crashed spectacularly, paid up to 20%.
Other platforms like Binance and Crypto.com would also pay 4%, 8%, or more on crypto, luring in a lot of people who could only get 0.01% interest from real banks. But how could someone pay interest on digital currency? By giving it back to hedge funds and other groups that also used leverage. Insanity.
Genesis Global Capital made a platform for lending money to make it easier for people to borrow crypto. What did they lend against? Again, just air.Gemini, founded by the Winklevoss twins, paid 8% interest to make customers money. Crypto returned why? Well-asked. It worked up, but not down. Cryptocurrency was passed around until its value dropped 90% and everyone had to pay off their debts. The dream could only end this way.
After the FTX collapse, most platforms are frozen and may disappear as customers rush to get their money out.. The only thing these crypto lenders had to do was ask, “What’s the collateral?” Where is the money? Without a good answer, no lender in their right mind would have loaned against it. No one asked, though.
Another example of a debt: Remember in 2020, when it came out that the “Nasdaq Whale” was a SoftBank fund that bought technology stocks using derivatives and borrowed money and then lost a lot of money? Well, SoftBank lost all $100 million it put into FTX, and here’s another strange thing: It’s possible that its CEO, Masayoshi Son, owes his company close to $5 billion. “Son has put up both his share in the funds and a part of his SoftBank share as collateral for the money he owes the company,” says the Financial Times. Since early 2021, the value of SoftBank stock has dropped by 50%, and the funds have gone down.
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