The Big Short 2?
FTX: The Fall-out + New podcast episode
Hello and welcome to the latest edition of Off to Lunch…
The fall-out from the collapse of FTX is being felt not just in the cryptocurrency world but in venture capital, sport and the media.
The rapid rise and fall of FTX and its founder Sam Bankman-Fried is a remarkable story. Just over a week ago FTX and Bankman-Fried were considered the public face of crypto. FTX was valued at $32 billion, had attracted funding from leading venture capital funds and had millions of customers. Bankman-Fried was regarded as one of the brightest entrepreneurs in the world. At just 30-years-old FTX’s founder was already a billionaire, had pledged to give away his fortune, and said he was working to make the world a better place.
Unsurprisingly, Hollywood is already interested in this story. In an incredible stroke of luck, Michael Lewis, the author behind Moneyball, The Big Short and Liar’s Poker (and pictured above) has been embedded with Bankman-Fried for the last six months for his new book. An agent is promoting the project to potential buyers in Hollywood. Apparently not a word of the book has been written yet, but Lewis says that the rivalry between Bankman-Fried and Changpeng Zhao of Binance (who played a role in the collapse of FTX by warning of problems and then pulling out of a deal to rescue it) is like the Luke Skywalker and Darth Vader of crypto. I will be reading this book, watching this film and listening to this podcast. I say this is a stroke of luck, but part of the brilliance of Lewis is his ability to spot a story. He had clearly done that with Bankman-Fried. You can read more about the book in a report by The Ankler, which broke this story, here.
Zhao has already pushed back on the narrative that he played a key part in the demise of FTX after someone tweeted that he was going to star in The Big Short 2…
I touched on the reasons for FTX’s collapse in Friday’s Off to Lunch and Sunday’s press review, which you can read here and here. The details are still emerging. But in short, FTX looks to have had way more liabilities than assets and borrowed money against a token (FTT) that it had issued and owned much of itself, which became a big problem when the value of that token fell. Bankman-Fried says mistakes were made. Authorities in the Bahamas (where FTX is headquartered) are investigating whether it was something more. Either way, for a business that promoted itself as one of the best places in the world to buy and sell cryptocurrencies online, it had become complex behind-the-scenes...
The shocking collapse of FTX has sparked concern about whether other crypto exchanges could hit trouble. The Wall Street Journal has reported on how some customers have withdrawn money from Crypto.com after its boss admitted sending a $400 million transaction to the wrong type of account. Story here and Twitter posts from Crypto.com boss Kris Marszalek below…
Zhao has tweeted again over the weekend on his concerns about the industry…
Crypto.com is smaller than FTX but has become a prominent brand in the crypto world. The Singapore-based company bought the naming rights to the LA Lakers basketball arena and is one of the main sponsors of Formula One.
Other crypto businesses are moving to reassure customers that they are safe and reliable. Check out this message from Kraken, for instance, a platform which allows customers to buy and sell crypto assets but also store them. Those who championed crypto assets caught up in this chaos are expressing their disappointment and saying they were let down. Check out this from Anthony Pompliano. He also tweeted this to his 1.6 million followers on Twitter…
The demise of big institutions in the crypto world echoes how financial organisations collapsed in the late 1800s and early 1900s as the modern-day Wall Street and City of London emerged. That is according to the latest post from the excellent Investor Amnesia, which covers financial and economic history. There were also allegations of fraud, scams and panic then. You can read the piece here.
On that note, Market Sentiment, another Substack publication, has done one of the clearest explainers I have read about what FTX was actually doing to get itself into this mess - ie how does a business that was supposed to be just a place you could buy, sell and trade end up lumbered with so much risk. This includes a look at the high-risk mindset of Bankman-Fried. You can read it here.
Looking beyond crypto, the demise of FTX has ramifications for sport - where it sponsored the Miami Heat basketball team, the Mercedes Formula One team and others - but also the media. Ben Smith’s latest newsletter for Semafor, the new media organisation he co-founded, touches on how Bankman-Fried was one of his backers and how the FTX boss was looking into creating a rival to Substack filled with his favourite writers. You can read that here.
The demise of FTX also has ramifications for the venture capital world, parts of which are feeling bruised after backing Bankman-Fried. This includes Sequoia Capital, one of the world’s leading venture capital firms, which has reportedly written down the value of its $210 million investment in FTX to zero. It had published a glowing interview of Bankman-Fried on its website. That has subsequently been taken down, but people smarter than me have found an archive version of it, so you can read it here
The Information, the tech news publisher, has done some great reporting on the reaction in the VC world. I want to flag two pieces. Firstly, a story on how venture capital funds, including some which backed FTX, have told start-ups and founders that they are going to find it harder to get funding now and if they do (or already have it) they will be expected to make cutbacks. You can read that here. Secondly, a look at the practicalities of how a venture capitalist can end up investing in a business that turns out to be a mess. In short, they bet on the person rather than the business, the fear of missing out, time constraints, and accepting that when you are looking for future stars with big upside you may also end up backing businesses that turn out to be a big failure. You can read that here.
This story is going to run and run. As well as what happens to FTX and its businesses now they are in Chapter 11 bankruptcy protection (will a buyer emerge for some of the assets?), there is the question about whether customers get their money back and what comes of the investigations into FTX by the various authorities around the world. Other parties are already getting dragged in too. For example, The Financial Times is reporting on the role of the auditors in all this…
Podcast…
The next episode of Business Studies is on the way later this week. It will be with you slightly later than usual, but please be patient, because it’s very topical and a cracking episode. I speak to Ed Smith, the chief selector for England cricket between 2018 and 2021, on the highs and lows of English cricket, decision-making, and what business can learn from elite sport.
England’s victory in the T20 World Cup final on Sunday is the latest chapter in the remarkable performance and turnaround of the men’s cricket team in recent years. England were humiliated in the World Cup of 2015 but just four years later won the 50-over World Cup and are now the first team to hold the 20-over and 50-over global titles at the same time.
Ed Smith had a front-row seat for the revolution in English cricket and played a key role in decisions that shaped the 2019 and 2022 teams, including Jos Buttler opening the batting and the selection of Sam Curran, who was named player of the tournament after Sunday’s final against Pakistan. However, he also faced big challenges, particularly with the test team.
We discuss all this and his new book Making Decisions in the latest episode of Business Studies. As an Off to Lunch subscriber you will be notified as soon as the episode is available…
Other stories that matter…
24-year-old George Sivulka has developed an AI-powered search engine called Hebbia. Some leading venture capitalists are betting that he and his search engine could be the future of the internet (The Information)
The £28 million redevelopment of a leisure centre in Halifax, which had got funding from the government’s levelling-up fund, has been put on hold due to soaring costs. This is an example of how inflation and the likelihood of a recession are posing new challenges to levelling up (Financial Times)
Sir Dave Lewis, the former boss of Tesco, has done an interview about the project he is leading to build a subsea power cable between the UK and Morocco. “Cables exist already of this length around the world in slightly different circumstances. I don’t want to diminish the challenge of actually doing it, but we’re not requiring a technology breakthrough,” Lewis says of the £18 billion project (The Times)
An interesting profile of Frasers Group chief executive Michael Murray on what it was like succeeding his father-in-law Mike Ashley as boss of the retail business, which owns Sports Direct, and how he is trying to modernise the company with new London offices, a blue-chip PR firm, better relationships with analysts, working with top fashion and sports brands and communicating clearly with staff (FT)
Joules has said it plans to appoint administrators just days after Made.com collapsed. 1,600 jobs are at risk in shops across the UK and in the Market Harborough-based company’s offices. Sadly, we are approaching the stage in the economic cycle where media organisations start to publish a tally of job losses and companies that have gone bust (BBC)
Finally, check out Off to Lunch’s Sunday press review for a round-up of the best news and analysis in the weekend papers. Paying members got this yesterday. You can sign-up now to read it and get next week’s edition, just click here.
And finally…
The Sinner on Netflix is one of those rare crime dramas that has managed to maintain its quality over multiple series (albeit with some highs and lows). Starring Bill Pullman, the fourth series has just launched on Netflix. The show’s unique selling point is that it focuses on unravelling the motives of the perpetrator rather than finding out who they are. As someone who considers the 1996 film Independence Day more than just a guilty pleasure and maybe one of the best films of all-time, it’s great to see Pullman - aka President Whitmore - in a leading role again. He has been nominated for a string of acting awards (including by the prestigious Screen Actors Guild) for his performance in The Sinner.
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Best
Graham