FTX To Soon To Sell?

Investment Analysis Clubs Macro Economic Trends and Risks
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Dealbook by Andrew Ross Sorken a NYT column.

Too quick to sell?

Working through the bankruptcy of FTX, Sam Bankman-Fried’s collapsed crypto exchange, is proving more complicated all the time. The latest evidence: a potentially lucrative missed opportunity that’s come to light after FTX offloaded warrants to buy an obscure crypto token.

The token is called Sui, and it made its trading debut on May 3. FTX — which is now being run by John Ray III, the restructuring expert who has recouped billions for creditors victimized by the mega-bankruptcies of Enron, Fruit of the Loom and Nortel Networks — sold its Sui warrants shortly before the token began trading.

Had FTX exercised the warrants, it would own, as of this morning, an asset worth more than $1 billion, even after a 75 percent drop since the start of trading last week.

Here’s what happened with Sui:

  • FTX invested about $101 million in Mysten Labs last year. Mysten was building a blockchain platform called Sui that relied on technology developed for Diem, Facebook’s aborted crypto project. Mysten attracted investors like Andreessen Horowitz, the Silicon Valley venture capital firm, and the cryptocurrency exchange Coinbase, pushing its valuation at one point to about $2 billion.

  • FTX led the fund-raising last summer. Its ownership interest included warrants for 890 million Sui crypto tokens that would be exercisable once the Sui platform launched. But FTX collapsed months later.

  • In March, FTX sought the bankruptcy court’s permission to sell its interest in Mysten for about $96 million, or $5 million less than the initial investment.

  • In April, that deal closed. On May 3, Sui tokens began trading, with prices quickly spiking. This morning, Sui was trading at $1.13.

FTX is in a race to recoup every penny as the creditor list swells. Bankman-Fried himself has said that if given enough time, he could find the assets of value in his vast empire to begin to pay back customers and investors.

The I.R.S. last month filed nearly $44 billion worth of “priority” tax claims against FTX’s estate and its sister trading firms, CoinDesk reports.

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I like Andrew Ross Sorken but he’s out to lunch on this one. The way these crytpo-scams work is they pump up some crap token through wash trades, and yes in theory it is worth $1 billion. But there is no exit liquidity which means it is effectively worth nothing. Had FTX exercised those warrants they would have been the bag holder.

In a nutshell, that’s what happened to FTX but in reverse. Their crap token (FTT) was on paper worth $XX billion, but when people tried to redeem them they found there was no exit liquidity (that is, a bigger fool could not be found) and the Ponzi collapsed. Bankman-Fried had all the dollars and his customers left with all the worthless tokens were the bag holders.

This particular ploy is the second oldest trick in the book. Once you take the mark’s money, you tell them you need just a little more money in order to save their original investment. This is why it is called a confidence game. You gain the mark’s confidence and continue to fleece him until he catches on.

Today’s lesson: Don’t be the bag holder in a Ponzi scheme.

Edit: In related news: SBF’s criminal defense team is arguing that while lying and cheating might be bad, it technically isn’t fraud.

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