Investment

What you should know about Sam Bankman-Fried, Worldcoin’s orb…and the current crypto boom

Crypto exchange FTX Trading has broken fund raising records for its sector by pulling in $1.4 billion in three months, taking its notional value to $25 billion.

It is only two years since FTX founder Sam Bankman-Fried raised his initial $8 million in seed capital from a round led by VC manager Race Capital.

Cryptocurrencies are worth nearly $2.5 trillion. Large US banks and asset managers are entering the crypto market, adding money and products to the mix.

FTX has now won backing from hedge fund managers, and their families, such as Danny Och, Paul Tudor Jones, Izzy Englander and Alan Howard.  

Other investors from a roll call of 69 include Temasek, Sequoia Capital, SoftBank, Ribbit Capital, Iconiq Growth, Mary Meeker’s Bond, Third Point, Thoma Bravo, Ontario Teachers pension plan and clients of BlackRock.

FTX’s success reflects the strength of a global liquidity surge which has led to a sharp rise in the value of nearly everything.  Crypto has been a particularly strong beneficiary, with VC funding trebling to $17 billion in a year, according to Bank of America. 

The glut of deals follows a surge in crypto trading, often by retail investors through Robinhood and other platforms. Nassim Nicholas Taleb advises a hedge fund, profiled in Family Capital on 24 August, which protects investors against a crash. He has pointed out on Twitter that Uber drivers have been trading saying it could soon be the signal to short cryptos.  

For now, however, the growth story is intact. Coindesk recently revealed that crypto specialist Paradigm, led by Fred Ehrsam, is seeking family office support for a $1.5 billion VC fund. Andreessen Horowitz raised $2.2 billion earlier this year. Sequoia Capital remains a keen crypto backer. To gain flexibility, it is proposing a restructuring of its funds so it can back startups for the long term. 

Cryptocurrencies are worth nearly $2.5 trillion. Large US banks and asset managers are entering the crypto market, adding money and products to the mix. They like to operate in complex markets, which can provide them with trading profits, as well as fees.  But tighter regulation could be the price of their entry, as banks seek to put crypto on their balance sheets.   

Sam Bankman-Fried, the son of two Stanford law professors, aged 29, is seen as a savvy operator, easily capable of dealing with an evolving market. Forbes says Bankman-Fried is worth a notional $26 billion. He is a believer in “effective altruism” where you make as much money as you can, then give it away.

He developed his career through an arbitrage trade between the low US price of bitcoin and higher prices in Korea and Japan. Putting together a deal to satisfy regulators and straddle decentralised markets was tough, but Bankman-Fried pulled it off.

He started Alameda Research to provide liquidity to crypto markets. FTX, based in the Bahamas, is now a leading cryptocurrency exchange. 

FTX has plans to develop in sectors such as NFTs, equities, betting and video games. Daily trade volumes are $14 billion and FTX is raising its profile through sport sponsorships. 

Rival crypto exchanges include Coinbase, a listed company worth $82 billion and Binance, an innovative platform, which has attracted regulatory scrutiny. Several diversified platforms like PayPal and Robinhood have been pushing into the market.

Professionals like crypto because exchange prices are more volatile than mainstream markets, giving them a chance to trade the ups and downs. 

In the year to August, with some help from leverage, crypto hedge funds rose 137% according to Eurekahedge. In 2020, says PwC they generated 128%. 

A growing range of offerings has broadened the opportunity.  One crypto, Solana, also backed by Race Capital, only started in 2020 and suffered a 17-hour outage in September. But its price has quintupled in six months because traders like its speed and efficiency. 

Ethereum is based on a successful blockchain platform for other services. It has gained 460% this year. Cardano is also favoured by green investors because it is structured to reduce carbon emissions generated by the validation of deals.

Bitcoin remains popular as a hedge against inflation and money printing. Late October’s flash crash in bitcoin led to a very brief 87% mark down in the price of bitcoin, and losses elsewhere, although crypto prices soon stabilised. 

Crypto bears like to point out that fiat currencies are relatively stable, paying interest on personal savings with the help of taxpayer support. Crypto bulls argue theirs is a rare opportunity for investors who want to participate in a sharp rally, while drawing comfort from the protection crypto provides against a macro shock triggered by debt and incompetent politicians. 

Whoever is right, crypto needs ongoing support from liquidity and an understanding approach from regulators. 

This October saw the launch of ETFs sponsored by ProShares and Valkyrie, newly approved by the SEC. Each of them seek to track the price of bitcoin by investing in its futures, making it easier and cheaper for investors to trade in crypto. Leveraged and short-biased ETFs are also proposed, though less likely to get approval, plus an etherium futures fund.  The growing use of crypto futures will deepen trading and hedging opportunities for institutional investors. The spread of opportunities may also dilute the performance of coin. 

The blockchain universe which supports crypto has expanded through the launch of Non-Fungible Tokens incorporating unique images of watches, art and sports stars. NFT blockchain is set to be incorporated into the metaverse. Hedge fund manager Steven Cohen is a backer. Animoca, backer to Decentraland and Sandbox, has just raised $65 million to develop its NFT and metaverse strategies. Binance has started hosting a post-apocalyptic metaverse called Erthe. Every blockchain provider is working out ways to get involved.

And liquidity is continuing to nourish new crypto launches. The latest is a cryptocurrency called Shiba Inu, named after a husky, which quadrupled in a month following determined buying and the adoption of its token as an incentive by a Paris restaurant. Pictures of Elon Musk with Shiba Inu puppy factored in its rise although he quickly denied buying it: “Don’t bet the farm on crypto!” he tweeted, although he added he owned bitcoin, etherium and dogecoin.  

Sam Altman used to run startup accelerator Y Combinator, a backer to companies like Stripe and Airbnb. He is now a backer to Worldcoin: “a new global digital currency that will launch by giving a share to every single person on earth.” It has just raised $25 million through funding backed by Reid Hoffman, founder of Linkedin, and Sam Bankman-Fried.

Worldcoin says it wants to give shares to individuals who agree to look into a silver sphere known as an orb, to read their iris pattern. Worldcoin says it needs the orb to stop multiple applications. It says it wants to offer people from around the world access to financial systems, with analysts saying it lead to development of a new payments system for the unbanked, to take on Western Union. 

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