FTX collapse is ‘slow-motion train wreck running into a dumpster fire full of black swans’: Analyst
The Wolf Of All Streets Podcast Host Scott Melker joins Yahoo Finance Live to look at the full picture of the crypto market amid FTX's downfall and the exchange's bankruptcy filing alongside Sam Bankman-Fried's resignation.
Video Transcript
RACHELLE AKUFFO: Well, joining us now for more on the FTX fallout is Scott Melker, "The Wolf of All Streets" podcast host. Good to have you on. Obviously, a very tough time to have to be on the show. So I want to get your reaction first. The Chapter 11 filing, SBF resigning as CEO. As someone with skin in the game, where are you in terms of how much this is shaking your faith in not just some of these platforms, but the tokens as well?
SCOTT MELKER: Well, I'd say it's shaking my faith absolutely zero in the actual asset class in technology, but hard to say the same for the actual platforms and infrastructure that's been built in the crypto space. I mean, what we have here is a slow motion train wreck running into a dumpster fire that's full of black swans.
This is about as bad of an event as we could possibly imagine because this is the biggest platform on the largest stage with the very person who was speaking to Washington regulators and legislators and trying to convince them of the legitimacy of this industry. As I said, the asset class will be just fine. But it's going to take quite a while for the actual industry to recover.
DAVE BRIGGS: It's a circular firing squad at this point, Scott. Who do you blame the most? Gary Gensler certainly taking some heat at the moment.
SCOTT MELKER: It's hard to place blame, and it's very easy to do that, I think, in hindsight. I think that there is some blame with the SEC and regulators for not offering clarity and pushing the entire industry and all of these investors offshore, making them find shadier counterparties to do business with. Also the very fact that we only had GBTC for people to invest in, and an ETF was never approved. Really very little clarity and very little protection for consumers with superior assets.
But at the end of the day, you have to blame hubris, greed, ego, humans, right? We had a bunch of very young people who were empowered, backed by the biggest money in the industry, who basically felt like gods and like they could do anything. And we all know how that story ends. We've seen it repeatedly, and I think it's just a massive disappointment that it ended this way with SBF, who really was viewed as sort of the white knight of the industry.
JARED BLIKRE: Scott, this is highly reminiscent of me personally for the bankruptcy of MF Global that took place almost exactly 11 years ago. I remember that the day after Halloween. I think that was when they did the filing. And it created chaos in the futures industry. And this was a well regulated industry, very entrenched. And it took years to sort out.
I'm just wondering, who are you talking to? Who are the experts who you're talking to? Is there any sense that people are going to come together to try and find some kind of common ground here in terms of a legal defense-- not only legal defenses, but customer coalitions to try and get some of the money returned to those people who lost it, and who should be first in line and are probably last?
SCOTT MELKER: I think that's an interesting question. And right now, I believe it's a big chaotic mess because all of these parties are somewhat separated. And to go back to my former point, we're looking at FTX filing Chapter 11 bankruptcy in the United States, but only FTX.us operates in the United States. FTX is actually an offshore entity. So I think that this is much more complicated because they are not actually entities that are regulated inside the United States.
I mean, you talk about obviously [? Corazon. ?] And I believe all of those investors eventually were actually made whole. That is not going to happen here. I mean, let's be frank. That is not the reality here. We're talking about a $16 billion entity that has a $10 billion hole in the balance sheet. I would say it would have been very unlikely that we were going to see a recovery of those assets.
Listen, I am a Voyager creditor myself. I believe I've said that before on this show. FTX was, of course, going to be coming in with the bailout, as you mentioned. That is not going to be the case. And anyone who's been down any of these processes knows it's going to be an exceptionally rocky road. I do think that the industry will come together. People will join forces. But I think that right now, it's a bit of every man for himself until we see a bit more organization and things settling down.
RACHELLE AKUFFO: And Scott, we know there's a lot of Monday morning quarterbacking about people who say they saw red flags, but I mean, you also had some institutional investors who clearly must have done their due diligence at some point for us to get to this point. But for a lot of investors wondering, then, where are the safe places or the reliable exchanges? Are you trying to discern that? How are you supposed to be able to discern that at this point?
SCOTT MELKER: I think that has become far more difficult than it was before. And to your point, you don't get investment from BlackRock and Sequoia and teaching-- the Ontario Teachers fund without due diligence. So I believe that when that last round of funding happened, probably the books were in order, and all of this started to really go down in April, May, June when Three Arrows Capital collapsed. So I think that's really where we're seeing the contagion here.
As for what's secure, it's a very, very obvious answer, and it goes back to the very ethos of Bitcoin. We won't talk about crypto. Let's talk about Bitcoin because it's very different. Not your keys, not your coins. You can buy on an exchange, but the safest way is to take any coins you're not actively trading or using, put them into self-custody, and become your own bank. That's literally the reason that this was invented.
We lost sight of that to a large degree as an industry and built basically a replica of 2008 in the financial system, but with inferior rails and no regulation. There was only one way, in hindsight, as the Monday morning quarterback, that this could have ended. And I think that the silver lining is that it will come back to the original ethos and importance of buying Bitcoin as an asset and custodying it yourself.
DAVE BRIGGS: Another Bitcoin bull like yourself, Scott, is Mark Cuban, the Dallas Mavericks owner and the tech billionaire. He spoke about this yesterday at the Sports Business Journal Dealmakers Conference. Here's what he had to say.
MARK CUBAN: First, you've got to understand crypto. There's speculation, right? That's all the noise, right? Then there's things that have happened with Voyager and with FTX now. That's somebody running a company that's just dumb as [BLEEP] and greedy, right? So what does Sam Bankman do? He just-- give me more, give me more, give me more. So I'm going to borrow money, loan it to my-- loan it to an affiliated company, and hope and pretend to myself that the FTT tokens that are in there on my balance sheet are going to sustain their value.
DAVE BRIGGS: Cuban went on to suggest there could be criminal charges eventually, depending on what exactly happened here. What's the next shoe to drop? What's the next domino here?
SCOTT MELKER: I have no idea if there's going to be criminal charges. I'm not a lawyer, but I can tell you that we're talking about the Great Recession in 2008, you don't see many people in jail. And a lot of the people that we've seen in the crypto industry who have been bad actors and have been a part of this contagion in the past are off surfing and writing long form blog posts about their emotions. So I don't have much faith that we're going to see very much punishment certainly for any of these offshore entities.
As for the next shoe to drop, we already saw BlockFi last night. It's a very circular industry, as you know. I mean, there's conjecture that BlockFi took that FTX loan for $400 million and loaned it back to Alameda Research to gain yield. Now I can't tell you if that's the fact, but we do know that those kind of things are happening in the industry.
I would expect there to be major fallout, a lot more institutions, especially the hedge fund hedge funds and investors, just absolutely falling apart in the future. But that doesn't mean very much for the future of the asset class, in my opinion. At this point, I think we would rather just liquidate and get rid of all of the bad actors and move on.
