The War Between Binance and FTX Has Hit Our Assets, But They’ll Bounce Back
When billionaires fight, it’s the rest of us who get bloodied the most.
I am talking about the crypto market and the sharp moves down it has seen this week. The reason for the fall has nothing to do with any fundamental changes to crypto or the economy, or even the Federal Reserve, which has been weighing on crypto for much of this year with its series of interest rate hikes.
In fact, since the summer, when the Fed began raising rates in steep, 0.75-percentage-point increments, crypto held its own. Bitcoin was actually a top-performing investment in the third quarter.
No, what’s happening now is largely personality-based…rather than anything to do with the fundamentals of crypto.
The issue: The CEO of Binance, the world’s largest crypto exchange, initiated a financial showdown with the CEO of FTX, a U.S.-based crypto exchange that quickly grew into the #2 exchange and was beginning to challenge Binance’s superiority.
It is a quintessential example of the Thucydides Trap—the idea that when an upstart challenges an incumbent leader, war often erupts because the entrenched leader is not eager to give up their position. And that is precisely what has occurred here.
FTX, led by an outspoken CEO named Sam Bankman-Fried, was angling to be a shaper of crypto policy at the governmental level in the U.S. Indeed, SBF, as Bankman-Fried is widely known, is one of America’s biggest political donors, not just in the crypto industry but in politics overall.
In essence, to beat Binance, he saw that weaponizing the U.S. political system would be to FTX’s benefit, given that Binance is owned by Changpeng Zhao, known as CZ, who was born in China.
CZ relocated Binance outside of China years ago, but it’s not hard to see how the U.S. government, in designing whatever crypto legislation ultimately emerges, could hurt Binance’s operations in various ways.
Clearly, Binance saw a risk in FTX/SBF driving the legislative narrative…and, thus, it had a clear motive to kneecap the upstart FTX now.
Which is exactly what began playing out this week.
Binance owned a large position in FTX’s in-house cryptocurrency called FTT. This week, CZ tweeted that Binance was exiting its FTT position because of fears that FTX and its investment arm, Alameda Research, were insolvent. There was no proof of that. And FTX, Bankman-Fried, and Alameda’s CEO, Caroline Ellison, counter-tweeted that the Binance allegations were essentially a bunch of horse-hockey.
However, we live in a volatile moment for crypto and the wider economy. Thus, innuendo is all it takes right now to tear down the girders that support a crypto business and insert uncertainty into investor mindset.
Whether FTX/Alameda was or wasn’t insolvent, the market wasn’t going to wait around to find out. Thus began what was effectively a bank run—which one suspects is exactly what Binance was angling for in attacking its strongest competitor.
FTX couldn’t sustain the demand for withdrawals without hitting other aspects of the business. That forced FTX to dump tons of assets to shore up other parts of the company. Most prominently, FTX began wholesale dumping its considerable holdings of Solana, one of the most important blockchains.
That selling saw Solana quickly dive into the high-teens from the low-$30s.
That set off selling elsewhere in the cryptosphere amid fears FTX would have to dump other holdings.
FTX ultimately jumped into the arms of its attacker, agreeing to be rescued by Binance and CZ.
Now, the fear is that Binance could dump FTX’s other crypto assets, which would put additional selling pressure on various cryptocurrencies (and, perversely, very likely see CZ gobble up a host of crypto assets like Solana at dirt-cheap prices).
Here’s my take: This is an unfortunate event. The market is moving not because of anything fundamental to crypto or the economy. It’s being ravaged by a war of personalities as an interloper tries to replace the king.
This is Godzilla vs. King Kong and the citizens below are the ones being trampled underfoot.
Ultimately, however, this is a short-term situation. In time, this market turbulence will pass and crypto will rebound higher.
Personally, that’s why I’m turning this situation to my advantage: I am looking to buy.
I’d already begun adding to my position in bitcoin in the last week or so, and I will be buying more soon. I will also be adding to my personal stake in Solana, which very likely will emerge as the #3 blockchain behind bitcoin and Ethereum.
I am not diving into Solana just yet. I want to see where the knife stops falling (likely in the mid-teens), and then I will look for some buying support. But I am confident we’ll see Solana pop back into the high-$20s, low-$30s fairly quickly, and then bitcoin, Ethereum and other blue-chip cryptos will rebound as well.
The reason I say this is because I just spent last weekend in Lisbon, Portugal at a crypto conference for Solana. I met with teams and developers who are building on the Solana network, so I know what they’re doing and what they’re focused on.
And I know that an arm-wrestling match between two crypto exchanges really has no bearing on the fundamentals of the Solana blockchain (or crypto in general). It certainly impacts price in the short term, as we’re seeing, but it doesn’t change the long-term value proposition of the blockchain itself or the projects being built for the blockchain.
So, my message: Don’t react to reactionary events.
Crypto as an asset class is still in its infancy (which is why you should never invest more in it than you can afford to lose). And young assets at the bleeding edge of technological progress always move with whipsaw volatility.
The supposed death of the internet in the early 2000s saw reactionary investors dive out of stocks like Amazon, which fell 95% peak to trough. But those who saw where the internet was going calmly, if not eagerly, accumulated a great company at going-out-of-business prices…and they rode Amazon to a 41,000% gain at one point.
History is filled with such lessons.
These kinds of moments, while painful on paper, are where real wealth begins.
P.S. I’m currently putting the finishing touches on the latest quarterly issue of Frontier Fortunes in which I’ll address the current status of the crypto market in greater detail. I’ll also offer an individual breakdown of the performance of our assets and explain why I remain so bullish on each of them. That issue will be with you in the next few weeks.
