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FTX’s collapse: How ND students and alum responded

| Friday, December 2, 2022

FTX, the crypto trading platform that headlined Super Bowl commercials last February, filed for bankruptcy Nov. 11 after using $10 billion in customer dollars to fund risky ventures at the affiliated trading firm Alameda Research.

Once hailed as crypto’s savior, FTX’s 30-year-old co-founder, Sam Bankman-Fried, quickly resigned and could now face criminal charges.

Investors are learning the hard way that markets move based on fundamental value, not personality. Many who were potentially swindled out of their investments, including several FTX employees, still do not know if they will ever see their money again. 

In response to FTX’s sudden collapse, crypto markets remain on edge in anticipation of continued fallout. This week, the contagion reached BlockFi, a crypto lender that declared bankruptcy Monday.

Notre Dame alumni and current students are no strangers to the crypto industry, and many matched the shock experienced by the market. But even as the dust settles, most aren’t stepping back from crypto as a whole.

Crypto firm co-founder and ND alum pins FTX collapse on bad actors

Daniel McGlinn ‘18 co-founded FirstWatch Crypto, a small firm helping investors gain exposure to cryptocurrency assets, with fellow Notre Dame graduate John Hrabrick ‘14. The Philadelphia-based duo also seeks to educate investors on the new asset class.

FirstWatch calls FTX’s collapse “an unfortunate story of fear and greed,” according to a recent newsletter. McGlinn says the situation is complex, but boils down to Bankman-Fried funding Alameda with money customers held on the FTX exchange.

“It’s just so in depth, and there are so many levels to the corruption, but really, Alameda Research and FTX were in cahoots with the FTT token. You have this token that was minted from nothing and used as leverage, and it’s a tricky game,” McGlinn said. “What happened is that FTX minted their token FTT and was using that as collateral to borrow and lend.”

FTX took money people deposited into the exchange and loaned it to Alameda. But even digital value can’t be in two places at once. 

He says FTX’s collapse was foreshadowed by similar implosions at Terra and Three Arrows Capital

Before the bankruptcy filing, FTX promoted an image of redemption, bailing out many struggling crypto players. Just months later, the firm that once rescued floundering crypto companies was in need of its own lifeline. 

“I was very surprised, and I think the whole market was, because you had Sam Bankman-Fried portrayed as this savior, this hero — he came up from nothing over three years and built a crypto empire,” McGlinn said. “Most of the market trusted him, thought what he was doing was great for the whole space, so I was very surprised.”

Bankman-Fried’s persona continues to intrigue those who follow crypto.

“There was an aura about him — even when he was pitching, he would be playing video games. It was built up that ‘Oh he’s this brilliant guy,’” McGlinn said. “We’re realizing now, because of his connections and how he’s managing money, that maybe he’s not so brilliant.”

McGlinn said many media outlets have been more lenient and forgiving to Bankman-Fried and individuals involved in the collapse than in past financial collapses.

“[Bankman-Fried] was not being transparent and he was not being truthful,” he said. “He was actively doing these things to hide what he was doing behind the scenes, such that even the auditors didn’t see some of the backdoor movements that were happening to move funds.” 

McGlinn, who graduated from Notre Dame with a degree in mechanical engineering, separates FTX’s collapse from the blockchain technology behind the crypto space. He entered the crypto industry because he was fascinated by blockchain technology and the possibility for people to “be their own bank.” He remains in the industry after the FTX shock for the same reason. 

Though he admits to months of an uncertain and rocky crypto space, he’s invested for the long term.

“I look at it at a tech level: What is this industry built on? It’s built on blockchain. It’s built on tokenization of assets, and those have nothing to do with centralized entities. We have the ability now to create decentralized entities that have performed perfectly well and have not been affected. It’s these unregulated, centralized, offshore companies that have collapsed,” he said.

FTX didn’t follow crypto’s decentralization thesis, though new avenues to access the world of digital assets will be needed, McGlinn added.

“There need to be centralized entities as bridges between the traditional finance and crypto worlds, or decentralized and centralized finance worlds. And FTX was that. It was an on-ramp. People could access crypto around the world and trade. Their token enabled people to do that, but what they were doing behind the scenes caused a lot of problems,” he said.

Already, exchanges like coinbase have started showing customers proof of reserves. McGlinn said increased transparency is central moving forward.

“That trust has been shattered for so many people that have lost money with FTX. How can we rebuild that and have more transparent entities?” he said.

What’s the biggest lesson from FTX? McGlinn says it’s to “be careful with trust” and “keep building.”

“There’s still a lot of promising products out there that will continue the advancement and be the next generation of tools that people can use,” he said.

Sophomore crypto project creator crosses paths with ‘sketchy’ Bahamian investor

Sophomore Kyle Beerbower has been a core team member for a real estate crypto project — Theopetra Labs — for a little over a year.

Last fall, Theopetra Labs was approached by a Bahamian investor, Beerbower said. This venture was similar to Alameda Research, the Bahamian hedge fund that cannibalized FTX customer funds to fund its risky projects, he explained.

“They offered us a very large sum, in the nine-figure range, to do not-very-ethical and arguably illegal things. Obviously, we said no. We kind of just shooed them off,” he recalls. “We had an interesting run in with a Bahamian venture. Immediately — red flags. I was looking at Alameda, too, and I thought, ‘There’s no way this is a green-light legal thing.’”

Beerbower says he never determined whether the fund that reached out to his project had any connection to Alameda. He says he became extremely wary when investors wanted “inside access” to pull financial levers, but would not disclose their identities. His experience suggests that the buy-out behavior FTX engaged in to purchase other crypto firms might not be uncommon.

“If that happened to us and we’re pretty small — you know, we’re not like big shots by any means — I’m curious to see how that unfolds over the next few months when all this basically gets made public from the bankruptcy filing,” he said.

Beerbower uses Coinbase, not FTX as a crypto exchange, though he says he was considering opening an account with FTX before the collapse.

“They had an awesome brand. I don’t think anyone saw it coming,” Beerbower said, echoing many other investors.

“They actually bailed out most competitors back in June. A lot of lending platforms went insolvent, and they actually bailed them out. Unbeknownst to everyone but three people in the world, they were using wire fraud to bail them out,” he said.

Like McGlinn, Beerbower sees the collapse as part of crypto’s growing pains.

“Kind of contrarian, but I’m kind of glad it happened. I mean, it sucks that they lost basically millions of people’s money,” he said, calling it the largest fraud in history. “My reaction for the industry is, it’s just short-term pain for a long-term benefit of wiping out all these over-leveraged bad actors. If you look at the history of any technology, every time there’s a new tech, I think the scale of fraud grows in size, and crypto’s just experiencing some version of it.”

Student crypto investors exit or step back from the industry

Robert Batistich, a sophomore from New Jersey who studies finance and economics, began trading a small amount of crypto holdings his senior year of high school. Last March, he sold his crypto assets and exited the space. The FTX collapse has only solidified his decision.

“I just felt like I got in it for the wrong reasons,” he said. “Like I understand it, but I don’t really see a future use with the current landscape of cryptocurrencies.”

Batistich used Coinbase to trade Bitcoin, but he is confident in his choice to exit.

“It just seemed like speculation … and I didn’t feel like I was in it for the right reasons,” he said.

After making that decision early in 2022, Batistich said he was not surprised when the news about FTX broke.

“I was not surprised at all, just with the whole crypto landscape, it’s totally unregulated or barely regulated, and just seeing that, I feel like something like that was bound to happen because a lot of people are just in it to make a quick buck,” he said.

He said crypto’s unregulated nature makes it a prime opportunity for those trying to make money unethically or buy and sell illicit substances.

“It’s just the crypto industry,” he said. “A lot of people aren’t the most ethical … at least one exchange is going to be headed by some jerk like SBF [Sam Bankman-Fried] or whoever, who is just totally making bad decisions.”

The situation has convinced Batistich that regulation will be necessary to prevent another collapse.

“The whole entire point of crypto is that it’s supposed to be unregulated, and it’s sort of liberating, so people don’t have to go through banks. They don’t have to deal with the government, but I just feel like … at this point, something needs to be done, like government regulation, otherwise people are just going to keep losing their money,” he said.

Even though he no longer feels confident enough to invest in crypto, Batistich said he thinks there is a future for blockchain technology, even if it isn’t as a currency.

“I totally think in the future Blockchain is going to be used in almost everything just because of how it works, the decentralization,” he said.

Similarly, junior Mitchell Brown, who used to mine ethereum in his dorm room in Duncan Hall, says the situation that occurred at FTX will continue to be a problem in the crypto space. 

“It’s incredibly inherent because the crypto space is so young,” he said. “It is unregulated and people aren’t monitoring it, so this is going to happen.”

Brown has made quite a few crypto investments, many of which he lost money on.

“So many things are turning out to be scams,” he said. “Despite the thousands I’ve lost, I’m still throwing money out for better or for worse — probably for worse.”

His current trading strategy involves creating an algorithm to buy new crypto coins early in their lifespans and ideally, sell them when their price peaks from popularity. 

Though Brown didn’t have any holdings in FTX, he says he will be more careful when choosing crypto exchanges in the future. Despite his grim view on the prevalence of crypto scams, Brown still expressed surprise at Bankman-Fried’s actions.

“He overstepped so many bounds, and it’s crazy that it went unchecked for so long,” he said. “It seems so conniving and back-handed.”

Contact Maggie Eastland at [email protected].

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About Maggie Eastland

Maggie Eastland currently serves as Editor-in-Chief. When she's not working in The Observer office or writing business news, you can find her reading a book, going for a run or drinking her sixth cup of SDH coffee.

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