FTX Pain Is Bitcoin's Gain

Summary

• Do you like Bitcoins and ham? We explore one SA reader's foray into Bitcoin poetry. (Future NFT project anyone???).
• FTX had a $1.4B short position in Bitcoin, suppressing the price.
• In 2017, there were many cryptocurrencies with distinct advantages to Bitcoin. Those advantages proved to be marginal in the long run. Those projects are now largely irrelevant.
• The same pattern is likely to repeat itself. Bitcoin may reap the benefits of the blockbuster R&D funding that has occurred over the last two years.
• In other words, hot air rushing out of the cryptocurrency ecosystem should refocus developer activity on Bitcoin. Centralized exchanges, such as FTX, were an impediment to progress.

LoopAll/iStock via Getty Images

Introduction

The collapse of FTX has left many people with the impression that "cryptocurrency is a scam". People who have dug their heals in on this issue now have reason to feel vindicated. Here is a witty little poem posted in response to FTX Is Crypto Cancer (So Is Coinbase):

Disclaimer: Sam Bankmen-Fried has not been formally charged with a crime at this point. There is no indication that FTX 'did not like SEC rules' as stated in the poem. I do not endorse the views of this poem, which is included in this article for satirical purposes only. (Paul T. Lambert, via Seeking Alpha)

It's worthy of a chuckle, but the nuance is more complex. Having helped pioneer institutional investment in cryptocurrency, and having lived through the "crypto winter" of 2018 and 2019, I would like to share my thoughts on where the industry is headed.

Update on FTX

It's important to know that FTX's Sam Bankman-Fried was notably not a Bitcoin maximalist, claiming that Bitcoin 'has no future as a payments network'. Bitcoin is decentralized, meaning no single person or entity controls it. FTX's FTT (FTT-USD) cryptocurrency is centralized, controlled by FTX. FTX used FTT to prop up Alameda, which allegedly traded against FTX clients, while allegedly using their accounts as collateral.

FTX was also the hype-man for other 'centralized crypto' projects, such as Solana (SOL-USD). Solana is incredibly impressive in many ways, but as it turns out, so centralized that you can pause it. (I sold all of my Solana earlier in the year.)

Twitter

FTX's disdain for Bitcoin clearly went beyond the opposing philosophies of decentralized finance vs 'centralized crypto'. FTX has been accused of holding a $1.4B short position in Bitcoin, holding zero Bitcoin reserves.

This suggests that when clients "bought" Bitcoin through FTX, they were actually receiving a Bitcoin I-O-U from FTX. Effectively, this would mean that FTX was suppressing the price of Bitcoin to the tune of $1.4B, and the only reason we know about it is because FTX is now bankrupt.

NYT

In addition to this alleged Bitcoin short, Sam Bankmen-Fried also sold $300M worth of FTX stock during a private funding round. He has not been arrested and is expected to speak at a conference in New York this week, alongside Ukrainian President Volodymyr Zelensky, US Treasury Secretary Janet Yellen, Blackrock CEO Larry Fink and Facebook founder Mark Zuckerberg.

The Crypto Cycle

Back in early 2017, these types of questions were asked quite frequently: Why Bitcoin? Why not Litecoin (LTC-USD)? Why not Monero (XMR-USD)? What about Ripple (XRP-USD)? What about DASH (DASH-USD)? What about Ethereum (ETH-USD)? Would you rather own Bitcoin or Bitcoin SV (BSV-USD)?

A snapshot of the ten largest cryptocurrencies in May 2017 (CoinDesk)

Each of these had their own distinct advantages over Bitcoin. Litecoin could do more transactions per second, so could DASH. Monero was more private Bitcoin (and still is), same for ZCash (ZEC-USD). Ripple/XRP had institutional support (before it was cool). NEM (XEM-USD) was adding new features to the blockchain, so was Ethereum.

In the long run, the distinct advantages of these different cryptocurrencies has proven to be marginal. Today, they are mostly irrelevant, with the exception of Ethereum. Bitcoin is capable of processing twice as many transactions as Visa at 1/13th of the cost, using Lightning Network. This system enabled El Salvador to roll out Bitcoin as legal tender.

Today, cryptocurrencies such as ZCash and DASH are mostly forgotten memories, buried under the torrent of recent smart-contract-enabled offerings. Cryptocurrencies such as Solana, Avalanche, Algorand, Cardano, Polkadot, Luna, Hedera, and Theta dazzled investors and VCs alike with innovative blockchain protocols and consensus mechanisms.

In 2021, the excitement of smart contracts, DAOs, decentralized exchanges, stablecoins, and NFTs propelled the cryptocurrency market to nearly $3T in capitalization. Once more, the question of Bitcoin's role and future became central to cryptocurrency. For the VC hype-machine, the future was FTT. For the Bitcoin community, "Rome wasn't built in a day."

So yeah... ...I think some of the other platforms in the in the wider crypto space have tokens. And so, they're more focused on advertising the token. And so, they tend to be very heavy on marketing.

Bitcoin doesn't have a marketing department. It just has lots of different individuals that own it, and essentially nobody really marketing it to the world, right? It's just marketed by organic adoption so it tends to be kind of low-key messaging, I guess. Right?

And the people building on it are more interested in building lasting value because they don't have a token that they're trying to like rush to market or sell or something.

-Adam Back, Blockstream CEO & Bitcoin pioneer

My thesis is that the future will look something like the past, that the advantages of today's cutting-edge projects will prove to be marginal in the long run. To that effect, the hot air that is rushing out of the crypto ecosystem will result in a renewed focus on Bitcoin; Bitcoin will be able to reap the benefits of billions in VC-funded R&D, slowly hoovering up open-source innovation.

This future is already emerging. There's work on a decentralized exchange for Bitcoin. There are multiple projects to bring more smart contract support to Bitcoin. There are Bitcoin sidechains. There are even Bitcoin-linked NFTs.

It begs the question, what new innovations will unleash the next wave of the cycle?

Conclusions

With the hot money making an exit, the industry is about go through a massive realignment of priorities and initiatives. I don't know where the price will ultimately bottom, but these developments are favorable to Bitcoin in the long run. It opens the door for Bitcoin to evolve beyond being "digital gold". It's a blow to centralized exchanges, which have become impediments to progress.

Similarly, there is a very strong case for Ethereum. Perhaps the next era will be characterized as a strategic competition between the two.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.