By James Thorne
You need to squint hard to see a silver lining in the crypto crash.
Nearly $2 trillion, or two-thirds of the sector’s value, has disappeared. Layoffs and hiring freezes are hitting young companies. And a deadly cocktail of too much leverage and too little liquidity continues to punish companies and funds that wrongly assumed the worst could not happen.
Yet where there’s crisis, there’s opportunity.
Billionaire crypto boss Sam Bankman-Fried has emerged as the man of the moment, using his companies to backstop other players with hundreds of millions in credit. Other executives also rightly see ripe opportunities to consolidate power and gain ground on competitors.
But Bankman-Fried’s exceptional actions have sparked a debate: Is he a white knight? A robber baron? Or something in between?
The crypto world is repeating decades of financial mistakes all at once, creating a field day for financial history buffs who have drawn comparisons to Lehman Brothers and the dot-com crash.
Bankman-Fried’s bailouts have forced amateur historians to look further back, all the way to 1907, when J.P. Morgan used his wealth and clout to help backstop a collapsing banking system.
The irony is that the 1907 debacle helped give rise to the modern, regulated financial system—with insured deposits, a central bank and other protections to stem the kind of panic that threatens decentralized finance today. Bankman-Fried’s bailouts have also provided fodder for critics who say that crypto banks aren’t all that different from regular banks, and perhaps should be regulated as such.
Quantitative trading firm Voyager Digital was the first to accept a lending hand, taking the equivalent of roughly $500 million—in bitcoin, dollars and stablecoin USDC—in credit from Alameda Research, the crypto trading firm founded by Bankman-Fried.
The second domino to fall was BlockFi, which accepted a $250 million credit facility from FTX, a trading platform co-founded by Bankman-Fried that has been backed by SoftBank and Sequoia. Even before the deal, layoffs and rumors of a significant down round signaled that BlockFi was in dire straits.
Both Voyager and BlockFi suffered in part as a result of problems at Three Arrows Capital, a crypto hedge fund that reportedly failed to meet its margin calls after borrowing from the two companies.
Bankman-Fried spun the moves as a philanthropic endeavor, telling NPR: “I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion. Even if we weren’t the ones who caused it, or weren’t involved in it. I think that’s what’s healthy for the ecosystem, and I want to do what can help it grow and thrive.”
If Bankman-Fried is crypto’s hero, he’s an unconventional one. Various profiles have described him as a man who wears shorts almost exclusively, works constantly, sleeps in beanbag chairs and refuses to cut his hair, even when testifying before Congress.
He’s also an avowed philanthropist and political donor who claims to pursue wealth as a means to an end of giving away as much as possible. And he has criticized crypto’s excesses: When asked by Bloomberg’s Matt Levine to describe yield farming, he all but called it a Ponzi scheme.
That said, it’s clear that there’s more self-interest at work than Bankman-Fried is letting on. FTX, which was valued at $32 billion in late January, is now in talks to acquire BlockFi, The Wall Street Journal reported just days after news of the credit line broke.
This is a game plan that FTX has used before: After Japanese crypto exchange Liquid suffered a hack in 2021, FTX stepped in with financing and acquired it not long after.
While it’s clear that Bankman-Fried’s empire could grow as a result of the crypto meltdown, he’s not the only one seizing the moment.
Binance CEO Changpeng Zhao, known as CZ, is taking a different approach, criticizing the bailing out of failing companies and the industry’s overreliance on leverage.
“Don’t perpetuate bad companies. Let them fail. Let other better projects take their place, and they will,” he wrote in a blog post.
Zhao’s approach aligns with the “code is law” view of crypto, which argues that humans shouldn’t interfere and instead allow the protocols to work as designed.
Instead of bailouts, Binance is making moves in other ways. This week the company eliminated fees on spot bitcoin trading, an attempt to attract traders as rivals like Coinbase and Gemini announce layoffs. Binance also launched a new platform for institutions and other large clients, in addition to striking an NFT deal with soccer phenom Cristiano Ronaldo.
More fallout will come as a result of falling asset prices and risky financial products, but Bankman-Fried, Zhao and other crypto bosses have an opportunity to consolidate their market share.
Bank of England deputy governor Jon Cunliffe summed up what the winners stand to gain. At the Point Zero Forum in Zurich this week, Cunliffe reportedly invoked the dot-com crisis as an analogy for crypto’s current moment:
“A lot of companies went, but the technology didn’t go away. It came back 10 years later, and those that survived—the Amazons and the eBays—turned out to be the dominant players.”