Private equity firms caught in the crossfire of the crypto exchange wars have started throwing their hands up.
Sequoia Capital wrote down the full value of its holdings in FTX, the venture capital firm said in a note to investors, shared on Twitter in the evening of Nov. 9. The venture capital firm’s decision comes after a roller-coaster ride questioning the fate—read: solvency—of the world’s third-largest cryptocurrency exchange.
Here’s a real quick summary of what went down:
😱 The chief of the largest cryptocurrency exchange Binance, Changpeng Zhao, poked holes in rival FTX’s credibility, offloaded half a billion dollars worth of FTX’s native tokens FTT, and sparked several sales that pushed prices down and created a liquidity crunch.
🤝 FTX’s billionaire founder Samuel Bankman-Fried, also known as SBF, went knocking for help—specifically on Zhao’s door. Binance extended a rope and said it would buy the ailing company.
🙅After hours of due diligence, Binance took a U-turn and bowed out of the purchase, saying the problems are “beyond our control or ability to help.”
Phew.
Some investors have also come to admit their FTX bet failed. “We are in the business of taking risk,” Sequoia wrote in its message to investors. “Some investments will surprise to the upside, and some will surprise to the downside.”
Sequoia, which had called SBF a “legend” and justified his “savior complex” in a blog post just a couple of months ago, is one in a long list of marquee backers in the controversial cryptocurrency. To name a few, there’s BlackRock, Ontario Teachers’ Pension Plan Board, and the troubled Tiger Global, which has already seen over half of its fund’s value erode in the last year.
Briefly, what’s next for FTT?
On a call with investors yesterday (Nov. 9), Bankman-Fried said FTX is teetering between finding cash infusion or declaring bankruptcy, Wall Street Journal reported.
Investors’ exposure to FTX, by the digits
$213.5 million: Sequoia’s investment in FTX.com and FTX.us—$150 million via its Global Growth III fund and $63.5 million its SCGE Fund. Each of the investments represented low-single digit shares of the funds
$1 billion: revenue FTX posted in 2021 when Sequoia invested
$7 million: loss reported by traditional trading firm Genesis after it “hedged and sold collateral” amid market volatility. Genesis said it has no material exposure to FTT or any other tokens issued by centralized exchanges nor does it have a lending relationship with FTX. It only has a trading relationship with FTX, amongst other exchanges
$76.8 million: Blockchain financial services firm Galaxy Digital’s exposure of cash and digital assets to FTX. Of this amount, $47.5 million is currently in the withdrawal process, the company said in its latest quarterly earnings call on Nov. 9
10%: assets under venture fund Multicoin Capital’s management that were affected. Multicoin says it has a trading relationship with FTX, along with other exchanges
<10%: Crypto trading firm Amber Group’s stuck assets on the FTX exchange. “It does not pose a threat to our business operations or liquidity,” the market maker said
Undetermined: Crypto market maker Wintermute said it had “remaining funds on FTX, and while this is not ideal, the amount is within our risk tolerances and does not have a significant impact on our overall financial position.” It did not quantify how much was stuck
$2.42: FTT token price on Nov. 10, down from $25 a week ago
$4 billion: equity funding SBF needs to fill the shortfall
What’s next for crypto exchanges, especially Binance
“User confidence is severely shaken. Regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get. And people now think we’re the biggest and will attack us more…We must significantly increase our transparency, proof-of-reserves, insurance funds, etc.” —Binance chief Changpeng Zhao
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