Old fashioned bank runs are remarkable to behold.
We got a glimpse of one back in 2008. There was all kinds of chaos and excitement for a few days. Iconic investment bank Lehman Brothers even collapsed in a heap.
But then the U.S. Treasury and the Federal Reserve (the Fed) stepped in to bail everybody out. Show over.
Well, last week one of the world’s largest cryptocurrency exchanges, FTX, gave us another show.
To set the stage, FTX was handling billions of dollars in crypto transactions every day. This drove over $1 billion in revenue last year.
And as a company FTX was valued at $32.5 billion at the start of last week. That’s thanks to pulling in nearly $2 billion in venture capital investment since its founding in 2019.
And look at who invested in FTX…
Sequoia Capital… Tiger Global Management… SoftBank… Ontario Teachers’ Pension Plan… Singapore’s sovereign wealth fund… Tom Brady and his former wife… Steph Curry… the list goes on.
These are all people who should have known better.
FTX’s CEO was a thirty-year old kid born with a silver spoon and deep family connections to the Deep State. He was the second largest donor to the 2020 Biden campaign. And he apparently had a favorable relationship with Securities and Exchange Commission (SEC) chair Gary Gensler… who has been openly hostile towards everybody else in the digital asset industry.
Plus, the CEO spent tens of millions sponsoring the Miami Heat’s basketball arena. And he inked another sponsorship deal with Major League Baseball to get the FTX logo on everybody’s uniforms.
So this guy clearly wasn’t focused exclusively on his core business. And he appeared to crave attention and fanfare. What could possibly go wrong?
And here’s the kicker – FTX had its own crypto token called FTT. These are tokens it could create at will.
Now, FTT tokens did not convey equity in the company. Instead, FTX provided reduced trading fees to anyone who held its token. And it would periodically buy back FTT tokens to destroy them. This was done to make FTT seem scarce.
But FTT wasn’t scarce.
In fact, the CEO used FTT to capitalize a quantitative crypto trading firm called Alameda. He also happened to be majority owner of this firm.
Last week we found out that Alameda had $5 billion worth of FTT on its balance sheet. And it was borrowing against that value to finance speculative “investments”. This is the same story we saw play out with the banks in 2008.
Those investments started to go bad in a big way this year. That’s when rumors came out that FTX was seeking billions in emergency financing. And, wisely, people with funds on the exchange began to worry that FTX had used their money to backstop Alameda’s losses.
That prompted the bank run last week. People rushed to get their digital assets off FTX. That is, until FTX stopped withdrawals. Ouch.
The word is that, when the dust settled, FTX was down to just one single bitcoin on its books. I’m not sure if that’s true. But it’s remarkable if so.
At first it looked like the industry would come to the rescue.
Binance, another massive cryptocurrency exchange, initially said it would try to bail out FTX for the good of the industry. But then they looked at the books and said “nope, we can’t touch that”.
So now FTX customers stand to lose everything. We’re talking billions of dollars lost.
And it doesn’t stop there.
We are going to see at least a few companies in the industry go under thanks to FTX. Anyone who lent them money or held assets on their exchange will be impacted. There will be a domino effect.
The good news is that this will likely drive the price of Bitcoin (BTC) lower. I think we could see one more push down to the $11,000 – $12,000 price range. That’s the capitulation moment.
If we want to profit from the crypto bank run, we should be buying Bitcoin on the way down. This will be the last opportunity we have to pick up BTC on the cheap.
And make no mistake about it – Bitcoin is a six-figure asset. It will trade at a price greater than $100,000 per bitcoin within the next five years. We’ll talk about why I’m so confident in that prediction tomorrow.
By the way, we go over all the good practices for allocating to Bitcoin in our newly revamped Finance for Freedom course.
This includes how to buy Bitcoin safely and securely… And how to self-custody using a hardware wallet. That’s how we protect ourselves from hacks and bank runs.
And of course, Bitcoin only makes up one part of a resilient asset allocation model. We talk about all the other pieces in the course as well.
Anyone interested can get more information on it right here: