3 Reasons Why the FTX Fiasco Is Bullish for Bitcoin

3 Reasons Why the FTX Fiasco Is Bullish for Bitcoin

The Bitcoin is dead gang is back and back in business. The fall of the FTX cryptocurrency exchange has resurrected these notorious critics, who once again blame the robbery on the stolen money, not the robber.

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

For example, Chetan Bhagat, a well-known author from India, wrote a detailed “crypto” obituary comparing the cryptocurrency sector to communism, which promised decentralization but ultimately led to authoritarianism.

Perhaps unsurprisingly, his column featured the melting Bitcoin (BTC) logo as its main image.

Bhagat should have chosen a more accurate image for his article (FTX token meltdown (FTT)?), especially after looking at more than a decade of bitcoin’s history, when it even survived nationwide bans. This includes 465 466 obituaries since its debut in 2009 when it traded for a few cents.

Bitcoin performance since debut. Source: Trading View

The collapse of FTX/Alameda is similar to previous bearish trigger events such as Mt.Gox in 2014. Thus, this failure of centralization will once again highlight what makes Bitcoin special and why FTX is the opposite of Bitcoin and decentralization.

Moreover, this incident should also spur the growth and development of non-custodial bitcoin exchanges that will help reduce dependency on trust.

FTX may not have had bitcoin in custody

Traders reacted to the shocking collapse of FTX by pulling their BTC off custodial exchanges. Notably, the total number of bitcoins held on all exchanges fell to 2.07 million BTC on November 17 from 2.29 million BTC at the start of the month.

US exchanges have seen the biggest outflows, with users withdrawing more than $1.5 billion in BTC in the last week alone.

Bitcoin reserves on all exchanges. Source: CryptoQuant

On Nov. 9, FTX suspended the withdrawal of all cryptocurrencies, including bitcoin, raising suspicions that the exchange did not have enough reserves to meet demand.

This was also evident in the leaked FTX balance sheet, which showed that the exchange has no bitcoin compared to its $1.4 billion commitment in BTC. In other words, FTX has enabled fractional reserve bitcoin trading.

“On the one hand, this is bad for you, since you will only know if they were swimming naked when the stock market crashes and you lose all your funds.” – Jan Wüstenfeld writes independent market analyst. He adds:

“On the other hand, it artificially increases the supply of bitcoins in the short term, suppressing the price and preventing actual price discovery. […] Yes, I know it’s not a real bitcoin, but as long as the exchanges issue fake securities, bitcoin remains in working order, there is an effect.

As such, little or no FTX exposure to bitcoin potentially reduces the chance of selling any remaining funds to boost liquidity.

The incident is also likely to spawn a new cohort of bitcoin hodlers, forcing people not to keep their funds on risky exchanges and practice self-custody. Whereas a decrease in the amount of BTC on exchanges means fewer coins available for sale.

Sam Bankman-Fried Was Anti-Bitcoin

FTX founder Sam Bankman-Fried (SBF) was the second biggest contributor to the Democrats after George Soros in the midterm elections, donating nearly $45 million to lobby for cryptocurrency regulations that would ostensibly benefit his firm.

Connected: U.S. Cryptocurrency Exchanges Lead Massive Bitcoin Outflows With Over $1.5B In BTC Withdrawn In A Week

But there are big speculations that the SBF was trying to tarnish Bitcoin’s rise through US lawmakers, as well as news articles that downplayed Bitcoin’s importance as an efficient payment system.

Other commentators have also pointed to a connection between the SBF and anti-crypto 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 faded and it faces criminal charges for misusing client funds for FTX transactions.

Press “F” to flush

Past downturns in the cryptocurrency market are rooted in the failures of centralized players, as well as in “altcoins”, which eventually turned into extortion of money.

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

Created and managed by centralized entities, the supply of these tokens, and therefore the price, becomes vulnerable to manipulation: undisclosed pre-mining distributions, insider venture deals, a small amount in circulation compared to the total supply, whatever.

It was the exposure to such (shitty) tokens, especially in the form of collateral, that ultimately led to crypto-currency hedge funds Three Arrow Capital, FTX subsidiary Alameda Research, and many others going bankrupt.

“In our opinion, the cryptocurrency bubble that burst this year was due to the creation of tokens for speculative purposes only,” notes BOOX Research, adding:

“While we can argue about which cryptocurrencies are ‘bad money crowding out good’, FTT and LUNA are just two examples that the general consensus should not have existed.”

Thus, the altcoin market flow that should never have been, including FTT, could further bolster investor confidence in bitcoin. Early data shows the same, with CoinShares reporting a rise in inflows to Bitcoin-backed investment funds.

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

Asset flow. Source: Bloomberg/CoinShares.

“The influx began later this week on the back of an extreme price drop driven by the FTX/Alameda crash,” said James Butterfill, head of research at CoinShares, adding:

“This suggests that investors are seeing this price weakness as an opportunity, distinguishing between ‘trusted’ third parties and a system that is not inherently trustworthy.”

Meanwhile, bitcoin is not experiencing a drop in demand in the current bear market compared to 2018, data from the network shows.

The number of non-zero bitcoin addresses continues to rise despite the downward price trend, hitting an all-time high of 43.14 million as of November 16th.

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

In comparison, during the 2018 bear market, the number of non-zero bitcoin addresses dropped significantly, suggesting that traders have become relatively more confident of a price recovery, especially as the FTX domino effect clears away dead wood.

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