The embattled cryptocurrency industry and its wealthy pioneers face a moment of reckoning after the collapse of crypto exchange FTX and hedge fund Alameda Research
In January 2022, Sam Bankman-Fried was riding high. His Bahamas-based FTX had just raised $400 million from prominent venture capitalists at a $32 billion valuation. A few weeks later, when Forbes published its annual World’s Billionaires list, SBF, as he’s known, was crypto’s second-wealthiest person, worth $24 billion.
Now, Bankman-Fried is likely broke, and awaiting trial. Before he was arrested in the Bahamas, SBF told several media outlets his bank account was down to $100,000, and that he was “not sure” how he’ll pay his lawyers. Gary Wang, FTX’s other cofounder and the company’s former chief technology officer–who entered a plea deal with the Securities and Exchange Commission–has also seen his fortune, once estimated at $5.9 billion, wiped.
FTX’s demise was a fitting end to a year of wealth destruction in the cryptocurrency and blockchain sector. The post-pandemic economic shock, which triggered inflation and rising interest rates, sucked capital out of the speculative crypto ecosystem. Prominent firms imploded, from the $40 billion collapse in May of algorithmic stablecoin TerraUSD, to the crypto hedge fund Three Arrows (which declared for bankruptcy in July), to the bankruptcies of interest-bearing lending businesses Voyager Digital, Celsius and BlockFi. Bitcoin, the largest cryptocurrency and an industry bellwether, is down 65% from its $69,000 peak in November 2021. Meanwhile some $2 trillion of market value has fled digital assets for safer pastures.
As a result, 17 of crypto’s wealthiest investors and founders have collectively lost an estimated $116 billion in personal wealth since March, according to Forbes’ estimates. Fifteen of them have lost more than half their fortune over the past nine months. Ten have lost their billionaire status altogether.
“We’re now at the breaking point in crypto where everyone will have to take a pause and say, ‘Okay, we’ve seen a ton of economic wealth destroyed in the last couple of months, we need to start taking this seriously,’” says Matt Cohen, founder of Ripple Ventures, a venture capital firm. “A lot of blockchain technologies and crypto companies built solutions for problems that didn’t need fixing, and I think we’re now going to have a hard reset.”
The man with the most to lose is Changpeng Zhao, CEO of Binance, crypto’s largest exchange, a sprawling global network of murky subsidiaries. CZ, as he’s known, has an estimated 70% stake in Binance, which Forbes’ values at $4.5 billion–down from $65 billion in March.
CZ helped set FTX’s demise in motion on November 6 when he tweeted that Binance would sell its remaining FTT, the native cryptocurrency of FTX. That triggered a run on FTX’s coffers as customers scrambled to withdraw their money, only to discover it was gone. FTX declared bankruptcy a few days later. Zhao prevailed over his rival, but now he must contend with the consequences. That could include the clawback in bankruptcy court of the over $2.1 billion that Binance made from selling its stake in FTX back to Bankman-Fried in the summer of 2021. (Zhao helped seed FTX in 2019.)
CZ also faces increased skepticism of centralized exchanges, particularly Binance, and ongoing investigations of him and his company by authorities in Europe and the United States over allegations of facilitating money laundering and other financial crimes. (Binance has denied wrongdoing.) In recent weeks, CZ has sought to reassure Binance users that their crypto deposits are fully backed, commissioning accounting firm Mazars to produce «proof of reserves» reports. These statements, which do not include liabilities, were widely criticized as insufficient for providing an incomplete snapshot of a company’s financial health. Mazars has since paused its work with crypto companies, adding to the uncertainty around Binance’s finances–and the exchange’s future.
“I don’t believe a business can persist, operating in this amorphous way, not governed by anyone or anywhere, especially when it’s run by a public individual,” says Lisa Ellis, an equity analyst at MoffettNathanson, a division of SVB Securities. Binance’s “dodgy operating model” would be a “non-starter for many investors, public or private,” adds Ellis.
CZ stated in a webinar on December 23 that Binance has zero liabilities: “We are quite a unique organization, we don’t have loans from any other organizations,” he said. “We will prove all the FUD [fear, uncertainty and doubt] is wrong.” A spokesperson for Binance said that Forbes’ estimate of CZ’s net worth “not an important metric for CZ. What’s more important is creating meaningful use cases for crypto.”
Barry Silbert, head of crypto conglomerate Digital Currency Group, is at the heart of crypto’s market contagion. One of DCG’s key assets, crypto lending unit Genesis Global Capital, owes creditors at least $1.8 billion, according to a source familiar with the matter (and as Reuters first reported). Additionally, DCG is saddled with debt. It assumed a $1.1 billion liability from Genesis, which stemmed from a bad loan Genesis had made to the now-bankrupt Three Arrows hedge fund. Separately, DCG owes Genesis another $575 million, which is due in May. DCG also owes $350 million to investment firm Elridge if Genesis goes under, the Financial Times reported.
To stay afloat, Silbert will likely have to raise outside capital or dismantle his DCG crypto empire, which includes some 200 investments in crypto firms and tokens, including crypto news site CoinDesk, bitcoin mining firm Foundry and Grayscale Investments, an asset management business that offers shares in a publicly traded Bitcoin trust. Forbes estimates the value of DCG’s outstanding liabilities are greater than the fair market value of its assets in the current market environment; DCG may also struggle to offload illiquid bets. For these reasons, Forbes estimates the current value of Silbert’s 40% stake in DCG to be approximately $0. Silbert’s personal investments could not be determined. A spokesperson for DCG declined to comment.
“They had a solvency issue at Genesis, which transformed into a liquidity issue. But those losses don’t disappear,” says Ram Ahluwalia, CEO of crypto-focused Lumida Wealth Management, who points out that Genesis creditors will have claims on DCG assets even if Genesis declares bankruptcy. “If DCG doesn’t raise fresh equity capital it will be perceived as a zombie business.”
Cameron and Tyler Winklevoss, the bitcoin billionaires immortalized in The Social Network for their role in Facebook’s founding, are also caught in Silbert’s lending web. Gemini, the twins’ privately held crypto exchange, offered their users returns as high as 8% during the bull market through their Gemini Earn product, which outsourced the loanmaking to Genesis; now Gemini customers are owed some $900 million by Genesis. On November 16, Genesis suspended withdrawals, leaving customers outraged. Gemini Dollar, the exchange’s stablecoin and a key component of Gemini Earn’s lending program, has experienced large outflows. The Winklevii have remained quiet, apart from sparsely worded Twitter updates about Gemini forming a creditor committee.
For Brian Armstrong, who is the CEO of publicly traded exchange Coinbase, FTX’s collapse presented an opportunity to strike. On November 8, in the chaotic hours after Binance announced its tentative takeover of FTX, Armstrong trumpeted his vision for crypto while dissing Binance’s Zhao. “Coinbase and Binance are following different approaches. We’re trying to follow a regulated, trusted approach,” Armstrong said on the Bankless podcast. “To look at it intellectually honestly, we’re choosing to follow the rules. It’s a more difficult path and sometimes your hands are tied, but I think that’s the right long-term strategy.” In a 13-tweet thread that same day, Armstrong reiterated those themes.
Investors don’t seem to care. Coinbase’s stock is down 64% since August and more than 95% from its $100 billion IPO in April 2021, wiping out much of Armstrong’s fortune.
Meanwhile, Coinbase’s other cofounder, Fred Ehrsam, got burned by Bankman-Fried. His crypto venture firm Paradigm invested $278 million in FTX equity. Ehrsam has not issued any public statements about the investment. Matt Huang, Ehrsam’s partner at Paradigm, said on Twitter: “We feel deep regret for having invested in a founder and company who ultimately did not align with crypto’s values and who have done enormous damage to the ecosystem,” adding that Paradigm’s equity investment in FTX “constituted a small part of our total assets” and that Paradigm had never entrusted FTX to hold any of its digital asset investments.
Private crypto firms that raised capital in 2021 or earlier this year at high valuations are being traded at significant markdowns on secondary markets and in over-the-counter deals, says Matt Cohen of Ripple Ventures, who expects to see larger markdowns for the fourth quarter as companies prepare year-end investor reports. “Q4 audit season is going to be the time when the rubber meets the road on what funds are going to be marked down properly,” he says.
For example, shares of NFT exchange OpenSea are trading at a 75% discount since January, when OpenSea hit a $13.3 billion valuation, according to data from private market exchanges ApeVue and CapLight. Daily trading volumes on OpenSea’s NFT exchange have been under $10 million in the last month, compared to over $200 million back in January, according to crypto site DappRadar. OpenSea’s 30-something cofounders, Devin Finzer and Alex Atallahh, are no longer billionaires.
Nikil Viswanathan and Joe Lau, the founders of Alchemy, a crypto software firm that powers other Web3 ventures, have also departed the three-comma club, based on estimated markdowns of their stakes in Alchemy, which last raised outside capital in February at a $10.2 billion valuation. According to Viswanathan, FTX’s collapse “hurts the consumer perception of the [crypto] space. We’ve seen this play out in the Lehman Brothers and Bernie Madoff collapses in 2008 — it takes time to recover.” Alchemy, however, has continued growing throughout the bear market, says Viswanathan. “The difference is in Web3 we’ve seen developer activity accelerate during even the most tumultuous times, which points to an incredibly strong, mission-driven community of builders.”
Jed McCaleb, cofounder of crypto firm Ripple, is believed to be the only person who made their fortune in crypto to have retained most of his fortune through the downturn. But that’s because he sold out almost entirely before the crash. McCaleb offloaded some $2.5 billion worth of XRP, Ripple’s native token, between December 2020 and July 2022, fulfilling the separation agreement he signed with Ripple’s other founders back in 2013. Today, XRP trades around $0.40 per coin, down around 50% from earlier this year, when McCaleb was dumping millions of dollars’ worth of XRP tokens each week.
Chris Larsen, Ripple’s other founder and its chairman, has lost over $2 billion this year, due to XRP’s declining price and Forbes’ estimated discount on Ripple’s equity valuation. Ripple, which last raised capital in 2019 at a $10 billion valuation, bought back shares from an investor last year at an inflated $15 billion valuation after that investor had sued Ripple in connection with a Securities and Exchange Commission lawsuit filed against Ripple in December 2020; that case is still working its way through courts.
Tim Draper, a venture capitalist who holds around 30,000 bitcoins, dropped from the billionaire ranks earlier this year, when Bitcoin hit $33,000. As ever though, Draper remains optimistic about bitcoin’s future, even though his oft-repeated $250,000 price target looks more fanciful by the day. “I suspect that this is the beginning of the end of the centralized tokens,” Draper tells Forbes. “If a token is centralized, you’re at the mercy of the person who controls the currency. And that was definitely the case with FTX.”