The Crypto Bailouts Have Begun. Is This the Only Way?
FTX CEO Sam Bankman-Fried has rushed to the rescue of ailing crypto firms so quickly amid the current crash that he is being compared to John Pierpont Morgan (the man himself, not the bank) in 1907. Now his rivals are taking note, and they want in on the bailout race.
Last month, FTX extended a $250 million line of credit to battered crypto lender BlockFi. One day later, Alameda Research, another SBF company, gave Voyager Digital a $500 million line of credit. Two weeks later, FTX came to terms to acquire BlockFi outright. SBF reportedly walked away from giving Celsius a similar rescue. And he told Reuters last week that FTX still has "a few billion" to help out other companies with one foot in the grave.
This isn't about magnanimity, and it's hard to see this as a positive for the crypto industry.
In Voyager's case, it turns out Alameda already owed Voyager $377 million. It isn't often you see a borrower bail out its lender. Binance CEO CZ criticized that Voyager bailout, telling us in an interview for the next gm podcast, "I would never do that type of deal. I would never say, 'I will invest in your company and then you loan me some money.' I would just not invest in that company, I'll keep my money."
Fair enough. But CZ obviously wants in on the bailout bonanza. He told us, "We're looking at a high number of deals" amid the crypto liquidity crisis, "and some of them are actually good deals. So I think you will see that we will be investing, bailing out, saving multiple projects."
Never one to miss out on a chance for press, Tron CEO Justin Sun told The Block that he's prepared to shell out $5 billion to help ailing crypto companies.
Cool. But these bailouts do not strike me as a healthy path out of the current crypto market depression. (Side note: Is it fair and accurate to refer to these financial lifelines as "bailouts"? I think it is; some disagree.)
Celsius, BlockFi, Voyager, and other crypto lenders that promised high yields for user deposits always looked too good to be true, and they were. They had delusional business models that presumed an "up only" market environment. Do they deserve to be saved?
To be fair, as CZ pointed out, it's better for users for companies that held their funds to get acquired rather than shut down. "This means that the users don't lose money or hopefully lose less money," he told us. He was also hesitant to shame the high-yield lenders. His take: when the crypto market is booming like it was in 2020 and 2021, "If your project only gives 2% yield, and then this other project gives 10% yield, guess what, you're gonna lose users. There's a herd behavior: If somebody else is doing this, I gotta do this to stay competitive."
But CZ also published a blog post on June 23, an obvious subtweet of SBF, in which he declared: "Don’t perpetuate bad companies. Let them fail."
I like that thinking. I tend to think the current Crypto Winter will wash out the weak, fly-by-night players and that the strong companies and projects will survive; the wheat will separate from the chaff.
But CZ will completely contradict himself if he jumps in now and starts doing bailouts of his own.
This is Editor's Node, a recurring weekend column from Editor-in-Chief Daniel Roberts. Read the previous edition: A Tale of Two NFT Parties: Doodles vs. Goblintown.
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