3 Reasons Why the FTX Fiasco Is Bullish for Bitcoin


The “Bitcoin-is-dead” mob is back and at it again. The fall of the FTX cryptocurrency exchange has resurrected these notorious critics, who once again blame the robbery, not the robber, but the stolen money.

“We need regulation! Why did the government allow this?” they shout.

For example, Chetan Bhagat, a popular author from India, wrote a detailed “crypto” obituary comparing the cryptocurrency sector to communism, which promised decentralization but resulted in authoritarianism.

Perhaps unsurprisingly, his column conveniently used the melting Bitcoin (BTC) logo.

Bhagat should have chosen a more accurate picture for his article, especially after looking at Bitcoin’s decade-plus history that has seen it even survive nationwide bans (FTX (FTT) Token Meltdown?). This includes 465 466 obituaries since its debut in 2009 when it sold for a few cents.

Bitcoin performance since debut. Source: TradingView

The collapse of FTX/Alameda in 2014 at Mt. Similar to previous bear triggering events like Gox. Therefore, this failure of centralization will once again highlight what makes Bitcoin special and why FTX is the opposite of Bitcoin and decentralization.

What’s more, the incident should also boost the growth and development of no-holds-barred exchanges for Bitcoin, which will help reduce reliance on trust.

FTX can have zero bitcoins in control

Traders responded to FTX’s shocking collapse by pulling their BTC from holding exchanges. It should be noted that the total amount of bitcoin on all exchanges fell to 2.07 million BTC on November 17, from 2.29 million BTC at the beginning of the month.

United States-based exchanges in particular saw the biggest outflows, with users withdrawing more than $1.5 billion in BTC in the past week alone.

Bitcoin stocks on all exchanges. Source: CryptoQuant

On November 9, FTX suspended withdrawals of all cryptocurrencies, including Bitcoin, raising suspicions that the exchange did not have adequate reserves to meet demand.

This was made even more apparent in the leaked FTX balance sheet, which showed the exchange had zero Bitcoin against its $1.4 billion in BTC liabilities. In other words, FTX allowed fractional reserve Bitcoin trading.

“It’s bad for you on the one hand, because you’ll only find out about their naked swim after the exchange blows up and you lose all your money,” says Jan Wüstenfeld. writes independent market analyst. He adds:

“On the other hand, it artificially increases the supply of bitcoin in the short term, depressing the price and preventing actual price discovery. […] Yes, I know that these are not real bitcoins, but the exchanges that issue fake paper have an effect as long as bitcoin is active.”

Thus, FTX’s very small exposure to Bitcoin makes it less likely to sell remaining funds to potentially increase liquidity.

The incident could also create a new cohort of Bitcoin hodlers, forcing people to exercise self-restraint and not hold their funds in risky exchanges. A decrease in the amount of BTC on exchanges means fewer coins that can be traded.

Sam Bankman-Fried was anti-bitcoin

FTX founder Sam Bankman-Fried (SBF) was Democrats’ second-biggest donor to midterm elections behind George Soros, giving his firm nearly $45 million to lobby for cryptocurrency regulations that are said to benefit him.

Related: US Crypto Exchanges Drive Bitcoin Spread: Over $1.5B BTC Mined in One Week

But speculations are rife that the SBF has tried to discredit Bitcoin’s growth through US lawmakers, as well as reports that it has downgraded Bitcoin as an efficient payment system.

Other commentators have also pointed to the connection between SBF and anti-cryptocurrency US Senator Elizabeth Warren, noting that the former’s father, Joseph Bankman, helped the politician draft tax legislation in 2016.

SBF’s influence among US lawmakers has now gone, with it facing potential criminal charges for illegally using client funds to trade FTX.

Press “F” to wash

Past cryptocurrency market declines have their roots in the failure of centralized players as well as “altcoins” that eventually took over the money.

FTX’s FTT token is the latest example. Other failed projects that have caused the market to decline this year alone include Defi lending platform Celsius Network (CEL) and Terra (LUNA).

Created and managed by centralized entities, the supply of these tokens, and therefore the price, is vulnerable to manipulation: undisclosed pre-mining allocations, insider VC deals, small float and total supply, you name it.

It is this kind of exposure to (empty) tokens, especially in the form of collateral, that ultimately brought down crypto hedge funds Three Arrow Capital, FTX’s sister company Alameda Research, and many others.

“In our opinion, the bubble that arose in cryptocurrency this year was in the atmosphere of tokens created only for speculative purposes,” said BOOX Research, adding:

“While we can debate which cryptocurrencies are ‘bad money out of good,’ FTT and LUNA are two examples that everyone can agree don’t exist.”

Therefore, the market influx of altcoins that should never have existed, including FTT, could further strengthen investors’ confidence in Bitcoin. Early data points to the same, with CoinShares reporting an increase in inflows into Bitcoin-based investment funds.

Note that Bitcoin-based investment vehicles attracted $18.8 million to their coffers in the week ending November 11, bringing their year-to-date inflows to $316.50 million.

Flow by asset. Source: Bloomberg/CoinShares

James Butterfill, head of research at CoinShares, added: “The inflows started on the back of extreme price weakness caused by the FTX/Alameda collapse at the end of the week:

“This suggests that investors are seeing this price weakness as an opportunity, distinguishing between ‘trusted’ third parties and an inherently unreliable system.”

At the same time, chain data shows that Bitcoin is not witnessing a collapse in demand in the current bear market compared to 2018.

The number of non-zero Bitcoin addresses continued to reach a record high of 43.14 million as of November 16, despite the price drop.

Bitcoin addresses are counted with a non-zero BTC balance. Source: Glassnode

In comparison, the bear market of 2018 saw a significant drop in the number of non-zero Bitcoin addresses, indicating that traders are more confident about the price recovery, especially as the FTX domino effect clears the dead trees.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, you should do your own research when making a decision.