The abrupt implosion of the FTX cryptocurrency exchange has sent an earthquake shock to the industry and beyond.
The financial woes of the company, which was valued at $32 billion in February, surprised many, as the firm and its CEO and founder Sam Bankman-Fried, had emerged as the saviors of many struggling crypto businesses in the summer.
They had bailed out prominent crypto lenders like BlockFi, Voyager Digital, Celsius Network and Robinhood (HOOD), which had suffered a liquidity crunch due to the abrupt collapse of sister cryptocurrencies Luna and UST, or TerraUSD.
What no one seemed to know was that FTX's practices and its balance sheet were not what Bankman-Fried and the company were claiming to be.
As a crypto exchange, FTX executed orders for their clients, taking their cash and buying crypto currencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
Cuban Is Angry
At the same time, FTX was using the crypto currency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT.
Once this exposure came to light, clients, fearing an FTX collapse, rushed to liquidate their crypto positions and get their money back. Customers on Nov. 6 withdrew a record $5 billion. It was a run on the exchange. This led to the insolvency of FTX, since it did not have the crypto assets, now on loan or sold, to honor its clients’ sell orders.
The panic caused cryptocurrency prices to plummet. Shares of crypto companies like Coinbase (COIN) and MicroStrategy (MSTR) are being sold by investors, who fear a contagion effect. The question now is which companies will be impacted.
Many retail investors and institutional investors will never see their money again.
For Mark Cuban, the FTX case highlights the dysfunction of the U.S Securities and Exchange Commission (SEC), the main regulator of the financial markets. Cuban believes that the federal agency allows publicly listed companies to get away with deliberately manipulating investors.
The owner of the Dallas Mavericks NBA franchise has just vented his anger over what he calls a laissez-faire attitude, whose victims are "suckers" or investors who buy the shares of companies on the promises of executives who are often tinged with falsehoods.
In essence, the billionaire attacks the system as a whole, even if he himself is part of the same system.
"The stock market is a platform where comps pretend that their shares of stock represent ownership in their enterprise. Using this pretense, they actively market their shares to buyers, attempting to drive up the price, often buying shares themselves, to make up for lack of demand," Cuban lambasted on Nov. 12 on Twitter.
'No Intrinsic Value'
In essence, the billionaire, who has invested in hundreds of companies and created a dozen himself, denounces the phenomenon of share buybacks, which is an indirect way for companies to boost their share price.
"Leveraging real or artificial demand they issue shares to themselves to accelerate their compensation, rarely doing the same for all but the employees who are already highly compensated," the billionaire added to his criticism of public companies.
He continued: "The myth of shares representing ownership falls apart when shareholders attempt to influence operations of the enterprise through recommendations or active participation in shareholder meetings where these efforts are summarily dismissed as annoyances. How am I doing so far ?"
For Cuban, these shares have "no intrinsic value."
"Their only value comes from selling to someone believing that the share will go up in value," Cuban said. "To increase demand, the company will market their stocks to funds and brokers in hopes they will buy their stocks and recommend them to their clients. One tool is quarterly earnings calls. Another is by creating modified reporting structures like EBITDA and other invented metrics."
EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors to gauge the financial health of a company.
Basically, the information that companies often give to investors is exaggerated at best and falsified at worst.
"Unfortunately for suckers, I mean investors, there are thousands of SEC approved companies that trade off the major exchanges for which there is little regulation, less information or liquidity, and where we often see BANKRUPT companies trade millions of shares," Cuban concluded.
