After the failure of cryptocurrency exchange FTX and hedge fund Alameda Research, the troubled cryptocurrency sector and its rich pioneers face a day of reckoning. In particular, these crypto founders and bitcoin moguls lost $116 billion in 2022.
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Sam Bankman-Fried was on a roll in January 2022. His Bahamas-based FTX had recently received $400 million at a $32 billion valuation from eminent venture capitalists. After a few weeks, SBF, as he is known, appeared on Forbes’ annual list of the world’s billionaires, where he ranked second amongst crypto billionaires with a $24 billion net worth.
Bankman-Fried is now possibly bankrupt and awaiting trial. SBF told many media organizations before his arrest in the Bahamas that his bank account was reduced to $100,000 and that he was “not sure” how he would pay his lawyers. Gary Wang, FTX’s other cofounder and former chief technology officer—who struck a plea deal with the Securities and Exchange Commission—has also had his fortune, which was originally estimated at $5.9 billion, wiped out.
The demise of FTX was an appropriate conclusion to a year of wealth devastation in the cryptocurrency and blockchain sectors. The post-pandemic economic collapse, which caused inflation and soaring interest rates, drained capital from the speculative cryptocurrency environment. From the $40 billion crash of algorithmic stablecoin TerraUSD in May to the crypto hedge fund Three Arrows (which filed bankruptcy in July), to the bankruptcies of interest-bearing lending organizations Voyager Digital, Celsius, and BlockFi, prominent firms have fallen. Bitcoin, the most valuable cryptocurrency and an industry barometer, has plummeted 65% from its peak of $69,000 in November 2021. Meanwhile, $2 trillion in market valuation has departed digital assets for safer pastures.
As a consequence, according to Forbes, 17 of cryptocurrency’s biggest investors and inventors have cumulatively lost approximately $116 billion in personal fortune since March. Over the last nine months, fifteen of them have lost more than half of their fortune. Ten people have lost their billionaire title entirely.
“We’re now at the breaking point in crypto where everyone will have to take a pause and say, ‘Okay, we’ve seen a ton of economic wealth destroyed in the last couple of months, we need to start taking this seriously,’” says Matt Cohen, founder of Ripple Ventures, a venture capital firm. “A lot of blockchain technologies and crypto companies built solutions for problems that didn’t need fixing, and I think we’re now going to have a hard reset.”
The person most at risk is Changpeng Zhao, the CEO of Binance, the biggest cryptocurrency exchange with a vast global network of mysterious affiliates. As he is commonly referred to, CZ owns an estimated 70% of Binance, which Forbes estimates at $4.5 billion, down from $65 billion in March.
CZ contributed to FTX’s collapse on November 6 when he announced that Binance would dump its remaining FTT, FTX’s native cryptocurrency. Customers hurried to withdraw their money, only to realize it was gone, triggering a run on FTX’s coffers. A few days later, FTX declared bankruptcy. Zhao defeated his opponent, but now he must deal with the consequences. This might entail a bankruptcy court clawback of the more than $2.1 billion Binance made from selling its stock in FTX back to Bankman-Fried in the summer of 2021. (In 2019, Zhao assisted in the seeding of FTX.)
On November 11, FTX Group and roughly 130 companies, comprising FTX Trading, FTX US, and Alameda Research, declared bankruptcy in the United States, citing a liquidity crunch. This occurred after SBF tried to destabilize the crypto market to save FTX, per reports.
CZ is also facing rising cynicism of centralized exchanges, particularly Binance, as well as active investigations into him and his firm by authorities in Europe and the United States on charges of money laundering and other financial crimes. (Binance denies any wrongdoing.) CZ has recently commissioned accounting firm Mazars to prepare “proof of reserves” reports in order to ensure Binance users that their crypto deposits are fully guaranteed. These statements, which exclude liabilities, were heavily criticized for offering an inadequate picture of a company’s financial health. Mazars has subsequently ceased working with cryptocurrency companies, adding to the uncertainty surrounding Binance’s finances—and the exchange’s survival.
“I don’t believe a business can persist, operating in this amorphous way, not governed by anyone or anywhere, especially when it’s run by a public individual,” says Lisa Ellis, an equity analyst at MoffettNathanson, a division of SVB Securities. Binance’s “dodgy operating model” would be a “non-starter for many investors, public or private,” adds Ellis.
Binance has no liabilities, according to CZ in a webinar on December 23: “We are quite a unique organization, we don’t have loans from any other organizations,” he said. “We will prove all the FUD [fear, uncertainty and doubt] is wrong.” A spokesperson for Binance said that Forbes’ estimate of CZ’s net worth “not an important metric for CZ. What’s more important is creating meaningful use cases for crypto.”
Barry Silbert, CEO of crypto giant Digital Currency Group, is in the epicenter of the crypto market’s epidemic. According to a source familiar with the case, one of DCG’s biggest assets, crypto lending unit Genesis Global Capital, owes creditors at least $1.8 billion (as Reuters first reported). Furthermore, DCG is plagued with debt. It took on a $1.1 billion obligation from Genesis resulting from a faulty loan Genesis made to the now-defunct Three Arrows hedge fund. In addition, DCG owes Genesis $575 million, which is scheduled in May. According to the Financial Times, DCG also owes $350 million to investment firm Elridge if Genesis collapses.
To stay above water, Silbert will probably need to raise outside funding or liquidate his DCG crypto empire, which consists of about 200 investments in companies and tokens related to cryptocurrencies, such as the bitcoin news site CoinDesk, the bitcoin mining company Foundry, and the asset management company Grayscale Investments, which provides shares in a publicly traded Bitcoin trust. In the present market environment, according to Forbes, DCG’s outstanding liabilities are valued higher than the fair market value of its assets, and the company may have trouble unloading illiquid bets. Due to these factors, Forbes determines that Silbert’s 40% ownership in DCG is currently worth around $0.
“They had a solvency issue at Genesis, which transformed into a liquidity issue. But those losses don’t disappear,” argues Ram Ahluwalia, CEO of crypto-focused Lumida Wealth Management, adding that Genesis creditors will have claims on DCG holdings even if Genesis files bankruptcy. “If DCG doesn’t raise fresh equity capital it will be perceived as a zombie business.”
The bitcoin billionaires Cameron and Tyler Winklevoss, who were recognized in The Social Network for their contribution to the creation of Facebook, are also entangled in Silbert’s loan network. The Gemini Earn product, which delegated loanmaking to Genesis, guaranteed customers yields as high as 8% during the bull market; as a result, Gemini clients are now owed about $900 million by Genesis. Gemini is the twins’ privately held cryptocurrency exchange. Customers were furious when Genesis banned withdrawals on November 16. The stablecoin of the exchange and a crucial part of Gemini Earn’s lending program, Gemini Dollar, has seen significant withdrawals. Aside from brief Twitter postings about Gemini creating a creditors committee, the Winklevii have been relatively silent.
The demise of FTX provided an opportunity for Brian Armstrong, CEO of publicly traded exchange Coinbase, to strike. In the turbulent hours that followed Binance’s potential takeover announcement of FTX on November 8, Armstrong spoke about his vision for cryptocurrencies while criticizing Zhao of Binance. “Coinbase and Binance are following different approaches. We’re trying to follow a regulated, trusted approach,” Armstrong said on the Bankless podcast. “To look at it intellectually honestly, we’re choosing to follow the rules. It’s a more difficult path and sometimes your hands are tied, but I think that’s the right long-term strategy.” Armstrong reaffirmed these themes in a thread of 13 tweets the same day.
Investors do not appear bothered. Armstrong lost most of his wealth as Coinbase’s shares fell by 64% since August and by more than 95% since its $100 billion IPO in April 2021.
Furthermore, Coinbase’s other cofounder, Fred Ehrsam, was burned by Bankman-Fried. Paradigm, his crypto venture firm, spent $278 million in FTX equity. Ehrsam has made no public statements regarding the investment. Ehrsam’s Paradigm partner, Matt Huang, stated on Twitter: “We feel deep regret for having invested in a founder and company who ultimately did not align with crypto’s values and who have done enormous damage to the ecosystem,” adding that Paradigm’s equity investment in FTX “constituted a small part of our total assets” and that Paradigm had never entrusted FTX to hold any of its digital asset investments.
According to Matt Cohen of Ripple Ventures, private crypto companies that raised money in 2021 or earlier this year at high valuations are currently trading at substantial markdowns on secondary markets and in over-the-counter deals. Cohen anticipates greater markdowns for the fourth quarter as businesses start preparing year-end investor reports. “Q4 audit season is going to be the time when the rubber meets the road on what funds are going to be marked down properly,” he says.
As per information from private market data providers ApeVue and Caplight, for instance, shares of NFT exchange OpenSea are currently selling at a 75% discount since January, when OpenSea attained a $13.3 billion valuation. According to cryptocurrency website DappRadar, daily trade volumes on OpenSea’s NFT exchange have dropped to under $10 million in the past month from over $200 million in January. Devin Finzer and Alex Atallahh, the cofounders of OpenSea who are in their 30s, are no longer billionaires.
The founders of Alchemy, a crypto tech startup that runs other Web3 ventures, Nikil Viswanathan and Joe Lau, have also left the three-comma group, based on estimated markdowns of their interests in Alchemy, which last solicited outside financing in February at a $10.2 billion valuation. According to Viswanathan, FTX’s collapse “hurts the consumer perception of the [crypto] space. We’ve seen this play out in the Lehman Brothers and Bernie Madoff collapses in 2008 — it takes time to recover.” Alchemy, however, has continued growing throughout the bear market, says Viswanathan. “The difference is in Web3 we’ve seen developer activity accelerate during even the most tumultuous times, which points to an incredibly strong, mission-driven community of builders.”
Jed McCaleb, cofounder of crypto business Ripple, is thought to be the only individual who acquired a fortune in crypto and has kept the majority of his income despite the collapse. But that is because he sold practically everything before the crash. Between December 2020 and July 2022, McCaleb sold $2.5 billion in XRP, Ripple’s native token, completing the separation agreement he agreed with Ripple’s other founders in 2013. XRP currently trades for roughly $0.40 per coin, a drop of around 50% from earlier in the year and, when McCaleb was unloading millions of dollars’ worth of XRP coins each week.
Chris Larsen, the other founder of Ripple and its chairman, has lost more than $2 billion this year as a result of the falling value of XRP and the estimated markdown on Ripple’s share valuation provided by Forbes. Ripple, which last raised capital in 2019 at a valuation of $10 billion, repurchased shares from an investor a year ago for an inflated valuation of $15 billion after the investor had sued Ripple in connection with a Securities and Exchange Commission lawsuit filed against Ripple in December 2020; that case is still making its way through the courts.
Tim Draper, a venture capitalist with about 30,000 bitcoins, fell out of the billionaire club earlier this year when Bitcoin reached $33,000. Draper, as always, is enthusiastic about bitcoin’s future, despite the fact that his often repeated $250,000 price target appears increasingly unrealistic with each passing day. “I suspect that this is the beginning of the end of the centralized tokens,” Draper tells Forbes. “If a token is centralized, you’re at the mercy of the person who controls the currency. And that was definitely the case with FTX.”
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