This time last year, venture capital (VC) firms couldn’t get enough of FTX and Sam Bankman-Fried (SBF) – but since the November collapse of the crypto empire all that has changed.
As the full horror story of the corporate governance vacuum that was FTX and Alameda Research is revealed, many are asking how VCs could fail so spectacularly in their duty of care to their investors.
In SBF’s parallel universe, he is working to make FTX depositors whole again, but after his appearance at the New York Times Deal Book event earlier this week, former customers will be wanting to know how what looks like fraud was allowed to play out in plain sight – or at least with the facilitating investments of VCs.
What due diligence did firms do before ploughing hundreds of millions into SBF’s companies? Not a lot by the look of it.
Why, for example, did so few of them stop to ask why there was no accounts department in a business that grew to a valuation of $35 billion?
Why did none of them seem to be aware that the offshore business was run from what a party house mansion in the Bahamas, where the conflicts of interest at the heart of the group took on physical manifestation in the form of the close personal relationships among the top team.
From here on, things are going to be changing in the crypto industry.
In our recent interview with Gavin Micheal, CEO of Bakkt we got some insight on what a well-run and regulated crypto company should look like:
We treat our customers’ funds as their funds. There’s no lending or leveraging or any of that.
We don’t do things like taking care of business investment through trust funds. We have legal walls between our different activities – it’s that level of transparency that is going to be central for the industry as a whole in how we move forward.
We set up our company with the guiding principles of compliance measures, controls, and rigorous risk management firmly in place. We want to make sure that we see that end to end regulatory clarity coming forward.
We have found 36 institutional investors in FTX
500 Startups
Greylock Partners
One Block Capital
Steadview Capital
Alan Howard
ICONIQ Growth
Ontario Teachers’ Pension Plan
Temasek International
BlackRock
Insight Partners
Paradigm
Thomas Bravo
Bond Capital
Institutional Venture Partners
Paul Tudor Jones
Tiger Global Management
Circle
Kenetic
Race Capital
Tribe Capital
Coinbase Ventures
Kevin Han
Ribbit Capital
VanEck
Consensus Lab
Lemniscap
Sea Capital
FBG Capital
Lightspeed Venture Partners
Sequoia Capital
Galois Capital
Multicoin Capital
Sino Capital
Greenoaks Capital
NEA
Softbank
Source Messari and Bloomberg. See the full data tables further down this story.
How was the commingling of FTX client funds with Alameda Research trading positions allowed to develop, apparently unhindered by even a half-hearted attempt to question company processes and controls?
Was this all an appalling case of ‘founder worship’ that was totally out of control and therefore blinded VCs to some obvious lines of enquiry – such as how is this business growing so incredibly quickly?
For sure, regulators have a lot to answer for too. If there were a way to set up a regulated crypto derivatives business in the US, then FTX wouldn’t have been in the Bahamas.
Hardly anyone in VC land seems to have been asking any of these questions or worrying about how things might unfold if the perennially volatile crypto market entered one of its many periods of extended drawdowns?
Not all VCs were fooled by FTX and SBF
Not all VCs were fooled by FTX though. Dragonfly Capital general partner Tom Schmidt speaking to Techcrunch, suggests that FTX could mark the end of an era of slovenly due diligence, and that is surely to be welcomed:
Schmidt believes that the past few years represented an “anomaly” in diligence and the traditional venture process. He recalls meetings with crossover funds backing a company, in some cases deploying 20x more capital than him, where the investor clearly did not have a fundamental understanding of what the company was doing.
….
“The thing about FTX and Alameda is that it was so unbelievable when you heard it,” he said. “We were never fans. This was supposed to be blue chip and have blue chip investors backing them but the numbers never made sense. If you looked at how much they were making and how much they were spending on stadium sponsorships and donations, nothing really made sense.”
Below are the VC firms in the FTX wall of shame
Click on the three dots ‘more’ button on the right when you hover over the infographic below to see full screen view:
We have looked at who is who in the world of VC investors in FTX, as you can see in the tables below. If their due diligence was so shoddy with FTX, what is it like with their other investments?
At the top of the pile of VC admirers is/was Sequoia Capital. Indeed such were the depths of its admiration that it published a blog post as recently as September this year singing the praises of SBF.
No accolade was too great. The Sequoia writer begins his homage by likening the genesis of of SBF’s Alameda Research to the creation story folklore associated with Apple and Google.
How SBF made his first $billion
SBF’s trading prowess, presumably dating in his time at Wall Street proprietary trading firm Jane Street Capital is also referenced.
SBF is thought to have made his first billion by arbitraging the stubborn delta premium on the bitcoin price in Asia and the western markets back in 2017.
But that was then. Currently Sequoia and a roll-call of the great and the good of the VC world are nursing their wounds.
Most firms have not publicly disclosed write-offs but those that have – or where their letters to their LPs [limited partners] and other investors have been leaked – probably provide a good indication of the extent of the capital destruction.
The following day Softbank disclosed a $100 million write-off.
Singapore’s Temasek has revealed the largest write down of them all so far – a loss of $275 million.
Multicoin Capital and the Ontario Teachers’ Pension Plan have written down $100 million and $95 million respectively and Sino Capital relatively modest $5 million by comparison.
Here’s a crypto prospect that has received VC funding and could 10x
If you are looking to repair your crypto portfolio then you might want to take a look at some up and coming coins, currently in presale but finishing soon.
Dash 2 Trade, which has received VC seed funding to the tune of $200,000, is a trading intelligence platform that will be launching a beta of its presale dashboard very soon, even before the presale ends.
It has already raised around $7.7 million from eager investors, likely encouraged by its focus on due diligence and bringing pro tools to the retail space.
In the light of the FTX collapse the market is crying out for analytics and signals to help traders to navigate cryptos sometimes treacherous waters.
This platform, with its auto-trading API, social sentiment metrics, social trading, tech indicators, backtesting and much more besides, could be the Bloomberg Terminal that retail traders have been waiting for, but without the eye-watering price tag – but do your due diligence before you consider investing.
The market is currently in a news-driven environment where the prices of cryptocurrencies have been determined by news agenda rather than fundamentals.
Bitfinex analysts have warned crypto investors to be cautious as bitcoin’s (BTC) recovery over the weekend is not a sign that its correction is over; the asset could witness more bloodshed in the near term.
In the latest Bitfinex Alpha report, experts deemed the market’s reaction this week critical, especially as supply alleviated over the weekend could return when traditional markets open.
“No Man’s Land”
Since Saturday, bitcoin has risen almost 10% from $57,600 to $63,000, closing last week in the green. The asset has surged above the 125-day range low of $60,200, which it broke through earlier this month after news of the German government’s massive BTC selling hit the market.
Market sentiment began to improve after reports that wallets linked to the German government were almost empty. However, the positive sentiment may not be sustained for long as the BTC the German authorities moved to trading desks and exchanges are yet to be sold.
While the supply from Germany appears to have been factored into bitcoin’s market price, Bitfinex analysts believe the end of selling pressure depends on how the involved trading desks execute their trades in the coming days.
Although the shift in sentiment underscores the market’s capacity to integrate new information and adjust expectations quickly, analysts think the market’s reaction over the first two trading days of the week cannot be overlooked for two reasons.
First, the low support level in the $60,200 range has now become a potential resistance line. Second, trading patterns over the past three months suggest that weekends are usually favorable for markets, especially on Saturdays when supply pressure seems to subside.
“We are now in no man’s land until we get clear resolution above or below this level,” the analysts said.
A News-Driven Environment
Besides the potential resistance level and three-month weekend trading pattern, the market is currently in a news-driven environment, where the prices of cryptocurrencies have been determined by news agendas rather than fundamentals.
Since selling pressure concerns are not yet completely obsolete due to upcoming Mt Gox creditor distributions, Bitfinex analysts expect such headlines to continue to have some impact on price movements. As such, the analysts urged investors to exercise caution in their trading strategies.
BlackRock’s IBIT led with $117.25 million in inflows on July 15, also being the most traded Bitcoin ETF.
The US spot Bitcoin ETFs recorded a daily net inflow of $301 million on July 15th. This extended their winning streak to seven consecutive days amidst a broader market recovery.
None of the ETFs recorded outflows for the day.
Bitcoin ETFs Rake in $16.11B in Net Inflows Since Jan
According to the data compiled by SoSoValue, BlackRock’s IBIT, the top spot Bitcoin ETF by net asset value, recorded the largest net inflows of the day at $117.25 million. IBIT was also the most actively traded Bitcoin ETF on Monday, with a volume of $1.24 billion. Ark Invest and 21Shares’ ARKB came in close behind with net inflows of $117.19 million.
Fidelity’s FBTC experienced net inflows of $36.15 million on Monday, while Bitwise’s BITB saw $15.24 million in inflows. VanEck’s HODL, Invesco and Galaxy Digital’s BTCO, and Franklin Templeton’s EZBC funds also recorded net inflows. Meanwhile, Grayscale’s GBTC and other ETFs, such as Valkyrie’s BRRR, WisdomTree’s BTCW, and Hashdex’s DEFI, registered no flows for the day.
A total of $2.26 billion was traded on Monday. The trading volume for these ETFs was less than in March when it exceeded $8 billion on some days. Meanwhile, these funds have collectively attracted $16.11 billion in net inflow since their January launch.
What’s Next For Bitcoin?
Earlier this month, bitcoin’s price decline was mainly due to fears of massive selling pressure from Mt. Gox and the German government’s BTC sales.
But the assassination attempt on pro-crypto former US President and presumptive Republican candidate Donald Trump at Saturday’s rally seemed to spark a recovery in the world’s largest digital asset, and experts are bullish on the asset’s price trajectory going forward. Bitcoin surged more than 9% over the past week and was currently trading slightly below $64,000.
Veteran trader Peter Brandt discussed bitcoin’s price outlook, suggesting a potential major rally. He referred to a pattern he terms “Hump->Slump->Bump->Dump->Pump” and highlighted that the July 5 double top attempt was a bear trap, confirmed by the July 13 close. He sees a likely continued upward trend but warned that a close below $56,000 would negate this bullish view.
“Bitcoin $BTC could be unfolding its often-repeated Hump…Slump…Bump…Dump…Pump chart construction. Jul 5 attempt at the double top was a bear trap, confirmed by Jul 13 close. Most likely scenario now is that bears are trapped. Close below $56k negates this interpretation”
PeckShield alert reveals LI.FI’s protocol vulnerability is similar to a March 2022 attack, with the same bug recurring.
The decentralized finance (DeFi) platform LI.FI protocol has suffered an exploit amounting to over $8 million.
Cyvers Alerts reported detecting suspicious transactions within the LI.FI cross-chain transaction aggregator.
LI.FI Issues Warning After $8 Million Exploit
LI.FI confirmed the breach in a statement on July 16 via X: “Please do not interact with any http://LI.FI powered applications for now! We’re investigating a potential exploit.” The team clarified that users who did not set infinite approval are not at risk, emphasizing that only those who manually set infinite approvals seem to be affected.
According to Cyvers Alerts, more than $8 million in user funds have been stolen, with the majority being stablecoins. According to on-chain data, the hacker’s wallet holds 1,715 Ether (ETH) valued at $5.8 million and USDC, USDT, and DAI stablecoins.
Cyvers Alerts advised users to revoke relevant authorizations immediately, noting that the attacker is actively converting USDC and USDT into ETH.
Crypto security firm Decurity provided insights into the exploit, stating that it involves the LI.FI bridge. “The root cause is a possibility of an arbitrary call with user-controlled data via depositToGasZipERC20() in GasZipFacet, which was deployed 5 days ago,” Decurity explained on X.
“In general, the risks behind routers, cross-chain swaps, etc. are about token approvals. Raw native assets like (unwrapped) ETH are safe from these kinds of hacks b/c they don’t have approvals as an option. Most users & wallets also no longer do “infinite approvals” which gives a smart contract total control on removing any amount of their tokens. It’s important to understand which tokens you’re approving to which contracts.
This dashboard looks for all transactions of a user that intersects Lifi. Not all of these transactions indicate risk- but you can see how, broadly, integrations & layers of tech (like how Metamask bridge uses Lifi on BSC) can complicate how users do or don’t put their assets at risk. Revoke Cash is the most well known approval manager app.
But it’s also good security practice to simply rotate your address. New addresses start with 0 approvals, so starting fresh by moving your tokens to a fresh address is another good security practice.” – commented Carlos Mercado, Data Scientist at Flipside Crypto.
Recent Exploit Mirrors March 2022 Attack
Further analysis by PeckShield alert revealed that the vulnerability is similar to a previous attack on LI.FI’s protocol that occurred on March 20, 2022. That incident saw a bad actor exploit LI.FI’s smart contract, specifically the swapping feature, before bridging.
The attacker manipulated the system to call token contracts directly within their contract’s context, making users who had given infinite approval vulnerable. This exploit resulted in the theft of approximately 205 ETH from 29 wallets, affecting tokens such as USDC, MATIC, RPL, GNO, USDT, MVI, AUDIO, AAVE, JRT, and DAI.
“The bug is basically the same. Are we learning anything from the past lesson(s)?” PeckShield Alert said in a July 16 X post.
Following the 2022 incident, LI.FI disabled all swap methods in its smart contract and worked on developing a fix to prevent future vulnerabilities. However, the recurrence of a similar exploit raises concerns about the platform’s security measures and whether adequate steps were taken to address the vulnerabilities identified in the previous breach.
LI.FI is a liquidity aggregation protocol that allows users to trade across various blockchains, venues, and bridges.
