3 Reasons Why the FTX Fiasco Is Bullish for Bitcoin
The “Bitcoin-is-dead” gang is back and at it again. The fall of the FTX cryptocurrency exchange has revived these notorious critics who once again blame a robbery on the money that was stolen, and not the robber.
“We need regulation! Why did the government let this happen?” they scream.
For example, Chetan Bhagat, a renowned author from India, wrote a detailed “crypto” obituary, comparing the cryptocurrency sector to communism that promised decentralization but ended up with authoritarianism.
Perhaps unsurprisingly, his column conveniently used a melting Bitcoin (BTC) logo as its featured image.
Hi all,
“Crypto is now dead: FTX, a cryptocurrency exchange, collapsed last week, proving many cool guys horribly wrong,” my column in TOI today.Read and share! pic.twitter.com/A4ClVdHOt2
— Chetan Bhagat (@chetan_bhagat) 15 November 2022
Bhagat should have chosen a more accurate image for his op-ed (melting FTX (FTT) Token?), especially after looking at Bitcoin’s decade-plus history that has seen it survive even nationwide bans. This includes 465 466 obituaries since its debut in 2009 when it was traded for a few pennies.
FTX/Alameda’s collapse is similar to previous bearish trigger events such as the Mt. Gox in 2014. Therefore, this failure of centralization will again emphasize what makes Bitcoin special, and why FTX is the opposite of Bitcoin and decentralization.
Moreover, the event should also boost the growth and development of non-custodial exchanges for Bitcoin that will help reduce reliance on trust.
FTX may have had zero Bitcoin in custody
Traders reacted to FTX’s shocking collapse by withdrawing their BTC from custodial exchanges. Notably, the total amount of Bitcoin held by all exchanges fell to 2.07 million BTC on November 17 from 2.29 million BTC at the beginning of the month.
US-based exchanges saw the biggest outflows, in particular, with users withdrawing over $1.5 billion in BTC in the past week alone.
On November 9, FTX halted withdrawals of all cryptocurrencies, including Bitcoin, raising suspicions that the exchange did not have sufficient reserves to meet demand.
That was further evident in a leaked FTX balance that showed the exchange had zero Bitcoin against its $1.4 billion in BTC liabilities. In other words, FTX enabled fractional trading of Bitcoin.
“This is, on the one hand, bad for you, as you will only find out if they have been swimming naked when the exchange implodes, accompanied by the loss of all your money,” Jan Wüstenfeld, write independent market analyst. He adds:
“On the other hand, this artificially increases bitcoin supply in the short term, suppresses the price and prevents actual price discovery […] Yes, I know these are not real bitcoin, but as long as the exchanges issue fake paper, Bitcoin remains operational, the effect is there.”
Thus, FTX’s small to negligible exposure to Bitcoin potentially reduces the likelihood of selling any remaining funds to obtain liquidity.
The incident is also likely to produce a new batch of Bitcoin hodlers by forcing people to not keep their money on risky exchanges and practice self-custody. While a decreasing amount of BTC on exchanges means fewer coins available for sale.
Sam Bankman-Fried was anti-Bitcoin
FTX founder Sam Bankman-Fried (SBF) was Democrats’ second-biggest donor after George Soros for the midterm elections, giving nearly $45 million to lobby for crypto regulations that would allegedly benefit his firm.
Related: US Crypto Exchanges Lead Bitcoin Exodus: Over $1.5B in BTC Withdrawn in One Week
But speculation is rife that SBF tried to blackmail Bitcoin’s growth through US lawmakers, as well as news articles, in which he downplayed Bitcoin as an effective payment system.
The MSM lionized this shady character. For example, here are 2 of the 219 articles about him on @FT. @SBF_FTX‘s anti-Bitcoin, pro-centralization and pro-heavy-handed regulation values certainly align with theirs.
Was he the poster boy for an orchestrated propaganda campaign? pic.twitter.com/PTIn1JudXG
— Bitcoms (@bitcoms) 15 November 2022
Other commentators have also pointed out a connection between SBF and US Senator Elizabeth Warren against crypto, noting the former’s father, Joseph Bankman, who helped the politician draft tax legislation in 2016.
This is crazy:
Elizabeth Warren is known to be an anti-crypto senator
Who helped her draft the 2016 tax legislation?
None other than Joseph (Joe) Bankman, father of SBFhttps://t.co/QMYkC2gpE9
— Ryan Shea (@ryaneshea) 15 November 2022
SBF’s influence with US lawmakers is now gone, and he faces potential criminal charges for illegally using client funds for FTX trades.
Press “F” to flush
Past downturns in the cryptocurrency market are rooted in the failure of centralized players as well as “altcoins” that ultimately ended up being a money grab.
FTX’s token FTT is just the latest example. Other failed projects that triggered a market decline just this year include Defi lending platform Celsius Network (CEL) and Terra (LUNA).
FTX is the opposite of #Bitcoin #Bitcoin its protocol was created precisely to prevent Ponzi schemes, bank runs, Enron’s, WorldCom’s, Bernie Madoff’s, Sam Bankman-Fried’s…
… rescue operations and redistribution of wealth.
Some get it, some don’t yet.
We are still early.
/21 m
— Nayib Bukele (@nayibbukele) 14 November 2022
Created and run by centralized entities, the supply of these tokens, and thus the price, becomes vulnerable to manipulation: undisclosed pre-mining allocations, insider VC deals, small float vs. total supply, you name it.
It is exposure to such (crap) tokens, especially in the form of security, that ultimately drove crypto hedge fund Three Arrow Capital, FTX’s sister firm Alameda Research, and many others to the ground.
“In our view, the bubble in crypto that appeared this year was in the atmosphere of tokens that were created only for speculative purposes,” BOOX Research noted, adding:
“While we can debate which cryptos are ‘bad money driving out the good’, FTT and LUNA are just two examples that everyone can agree should not have existed.”
Therefore, a market flurry of altcoins that should never have existed, including FTT, could further strengthen investors’ confidence in Bitcoin. Early data shows the same, with CoinShares reporting an increase in inflows into Bitcoin-based investment funds.
Notably, Bitcoin-based investment vehicles attracted $18.8 million into their coffers in the week ending November 11, bringing their year-to-date inflows to $316.50 million.
“The inflows began later in the week on the back of extreme price weakness caused by the FTX/Alameda collapse,” noted James Butterfill, head of research at CoinShares, adding:
“It suggests that investors see this price weakness as an opportunity, distinguishing between ‘trusted’ third parties and an inherently untrustworthy system.”
Meanwhile, Bitcoin is not witnessing a collapse in demand in the current bear market compared to 2018, data from the chain shows.
The number of non-zero Bitcoin addresses has continued to rise despite the price drop, reaching a record 43.14 million as of November 16.
In comparison, the bear market of 2018 saw a significant drop in the number of non-zero Bitcoin addresses, suggesting that traders have become relatively more confident of a price recovery, especially as the FTX domino effect removes the dead wood.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trade involves risk, you should do your own research when making a decision.
