In this episode of Blockworks Macro, James Block, author at Dirty Bubble Media, joins Jack to explain the knock-on effects of the demise of the crypto exchange FTX. James is an amateur crypto researcher who saw in FTX and Alameda Research what many crypto professionals missed: hidden leverage, inflated assets, and in some cases, outright fraud. He now shares his view on potential contagion to Gemini, Genesis, Digital Currency Group (DCG), BlockFi, and other firms in the crypto ecosystem.
Read our notes below to learn more.
Intro
James is skeptical about Crypto, even BTC and ETH.
James in Early November wrote a piece "Is Alameda Research Insolvent?".
James previously closely investigated Celsius.
Found out that Alameda was using incredibly illiquid tokens that they had invested in to create billions of fake dollar value.
Red Flags With Alameda & Celsius
Celsius and Alameda had a close relationship as Celsius used $CEL token to raise capital like FTX used different illiquid coins to borrow.
Tether has a very close relationship with both Celsius and Alameda.
Alameda owned 80% of the locked FTT supply which they were using to borrow USD against.
FTT tokens were moving in a giant circle (see above map of FTT token movements).
At least there was a mortgage sitting in the 2008 financial crisis, here it is just pieces of code sitting on the blockchain.
Bitcoin and Ethereum at least have other people who believe that those tokens have value.
$FTT gave benefits on FTX exchange like lesser fees.
Binance
The only difference between FTX and Binance is that Binance has a blockchain associated with them.
Doesn’t believe any of these tokens have any value and $BNB chain is used only for small scammy tokens.
Binance has its own stablecoin $BUSD issued by Paxos and they might be more trustworthy than Tether.
Crypto firms like Binance show that they have these many assets but they do not show their liabilities.
James says what CZ did to FTX was probably a move of desperation than one of strength.
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Crypto Contagion
Thinks the risk of contagion is very high.
FTX’s creditors are still unknown and they might have large sums locked.
Venture Firms that trade crypto produce nothing of value and they destroy capital.
There are rug pulls, and companies like FTX/Celsius that use inflated token supply to borrow USD.
Sam might not be the only bad guy in the crypto space unless it is known how all crypto companies are managed.
Digital Currency Group (DCG) and Genesis
Crypto companies will say they are solvent until they aren’t.
One of the reasons 3AC blew up was because they were stuck with a lot of discounted $GBTC along with their $LUNA investment going to 0. There were questionable things going on between 3AC and Genesis as they were lending a lot of money to 3AC.
DCG group is the parent company of CoinDesk and Genesis took a $1.2B loss with their GBTC trade with 3AC.
Gemini Earn money was sent to Genesis to earn yield which was used by DCG to buy back its own stock.
DCG makes most of its $800m yearly revenue from Grayscale fees, unsure where the revenue goes.
Where Did Crypto Yield Come From?
Companies like Celsius were offering high yields while investing in crypto companies that did not generate revenue expecting the value of their investments to multiply to pay interest to their customers.
There is no easily extractable value in crypto like it used to be.
Was The $8 Billion Ever At FTX To Begin With?
People were sending money to Alameda in 2019 when they wanted to send money to their FTX account.
It could be possible that funds never reached FTX.
Alameda’s pitch when they were trying to raise money was that they’ll generate “15% profits risk-free” which is a huge red flag.
What's The Next Shoe To Drop?
Everyone is at risk there is no exception.
Bitcoin mining companies might be at risk.
Check Out These Important Links
TODAY’S EDITION IS BROUGHT TO YOU BY LEDGER HARDWARE WALLET
We are all having trust issues with centralised exchanges this week so we have partnered with the Ledger, who is the industry leader and most trusted vendor in the hardware wallet space.
Using a hardware wallet is the smartest way to secure your assets.
Act now, click the link below and secure your crypto.