The downfall of cryptocurrency exchange FTX on Nov. 8 could be a wakeup call for investors who expressed confusion and concern about the valuation of the digital assets.
Venture capital firms made large investments into FTX in 2021 with Sequoia providing $420 million in a round that that boosted the exchange's valuation to $25 billion in October 2021. A consortium with Paradigm invested $400 million in January 2022, bringing the valuation to a massive $32 billion.
But now Binance, the crypto behemoth, will acquire FTX, which was once its rival due to a "liquidity crunch" in what is likely a fire sale.
The terms of the deal were not disclosed and an acquisition of the two companies were surprising since Binance founder Changpeng Zhao and FTX founder Sam Bankman-Fried have fought for several months on social media, including a major clash this week.
“To protect users, we signed a non-binding LOI, intending to fully acquire FTX and help cover the liquidity crunch," Zhao said in a tweet. "We will be conducting a full DD in the coming days.”
The first investor that funded FTX was Binance, the largest global crypto exchange, but the relationship between the two companies crumbled as FTX gained popularity and fans.
Eric Newcomer, an author and podcast host and former tech reporter, said the deal is reminiscent of the late 1990s when many startups went belly up.
"And now it's selling in a fire sale?" he tweeted. "This is a truly crazy event in startup world. Dot-com bust level event."
Stadium Naming Rights: A Curse?
Investors have long been wary of companies purchasing naming rights to stadiums because they appear to be cursed and wind up filing for bankruptcy protection later on.
In 2021, the crypto exchange agreed to a 19-year deal to pay $135 million to change the name of the home of the NBA's Miami Heat to FTX Arena. It had previously been named the AmericanAirlines Arena since 1999 when it opened.
Crypto.com agreed in 2021 to a 20-year deal to commit $700 million to rename the former Staples Center, home of the L.A. Lakers, another NBA team.
Both deals were conducted before the crypto winter, the bear market of the virtual currencies.
Mike Koehl, an investor, said he has various guidelines he deploys.
"I have this list of 'rules' that I have developed over 30+ years," he tweeted. "#6 Never invest in a company which has a stadium named after itself. This has over a 90% win rate."
VCs Lack Information
Investors could be left in the lurch since media reports show confusion even from the venture capitalists who backed FTX.
Dan Primack, an editor at Axios, reported in a tweet that "FTX investor tells me that the company has not yet sent them any information on the deal. Says all he knows is what he's seeing on Twitter."
Other venture capitalists confirm the lack of information, Primack tweeted.
"Now hearing this from additional VC sources," he said. "Total cluster. This really could be a death knell for crypto VC. Not exaggerating."
Nick Mehta, CEO of GainsightHQ, a growth platform for customer success, product, and community teams, said he was worried other asset classes could be impacted.
"My biggest worry is there are many other shoes to fall across many asset classes (not just crypto)," he tweeted. "As Buffett says 'A rising tide floats all boats….. only when the tide goes out do you discover who's been swimming naked.'"
Another person, Matt Parker, CEO of Modern Tax, a tax data services for financial companies, speculated that the U.S. operations could be affected also.
"the end is near for http://FTX.us as well," he tweeted.
Investors on Reddit theorized that FTX's problems were similar to the downfall of Luna, a crypto network that wiped out $60 billion in valuation.
One wrote, "FTX, oh no lol Luna part 2 incoming."
Another Reddit user commented on the lack of liquidity in the crypto market, writing "Wow, it clearly shows how shit liquidity really is and how quickly the house of cards comes down once it reaches critical momentum.
Almost at 9 now, some lucky duck who brought 2 hours ago is already down 50%. And this is one of those, I hate to use this word, but token with more QuAlITy."
