What Are Crypto Diehards Rebuilding After FTX’s Fall?

Published Dec 6, 2022, 10:00 AM

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“It’s time to rebuild…” is a catchy phrase often said by crypto industry folks after massive implosions, like the one we just had with FTX. In the aftermath of these moments, investors are known to imagine all the potential for growth after the downturns. 

But this year in crypto the time for rebuilding has come often far too often, some might say. Nearly every crypto believer is saying let’s rebuild. But a valid question would be: rebuild what? Bloomberg crypto blogger Emily Nicolle joins senior editor Philip Lagerkranser in this episode to talk about what, (if anything) might be rebuilt.

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This is Bloomberg Crypto Daily Bloomberg I heard podcast and I'm Philip Lawyer Krans their senior crypto editor for Bloomberg News. In today for Stacy Marie Ishmael, it's Tuesday, December six, It's time to rebuild. Guess what it is the perfect time to build, grow, how the build things, time to build up, taking the time to actually build, a great opportunity to build. You know what time it is? Okay, it's time to build. Time to put our heads down in a down market and and really, you know, make projects that will last. Well. That's a catchy phrase that's often used by the crypto industry folks after they've had a massive implotion like the one we just had in which Crypto Exchange f t X filed for bankruptcy after withdrawals first stopped and the company's very well known CEO, Sam Bankman Free resigned. Now here's the problem. There have been many times to rebuild this year. We've had many implotions this year, and so the skeptic could be forgiven for asking exactly what are we going to rebuild? Well, here to help me answer that question today is Bloomberg crypto blogger and Malina called I guess in crypto the thing to be wary of is people flashing about the money and saying, we have this bitch around to invest in companies, or we're going to save that one, We're going to save that one um and actually that not happening in the end. So we keep hearing this phrase again, you know, the refrain of it's time to build or it's time to rebuild um, whichever you prefer. But the question is build exactly. It's often the phrase that you hear in crypto, right like It's always like when when you get into the dull drums of the market, it's the time that crypto should be focusing on rebuilding itself but also coming up with the most innovative new things that will lead the next bull market. So it was often said at the beginning of this year that, for example, some of crypto's biggest companies were founded in the last bear market. And it's what even some of the sector's largest spectra capitalists like Andrews and horrow It's are very big proponents of They talk about things like hype cycles and they show fancy looking diagrams where they say like we're in our fourth or fifth hype cycle. I think we are half for crypto, UM and and so like it's in these moments where crypto seems we've beaten down that actually it's where at least as investors they can see projects that might be the biggest giants for the next one and so UM, I guess there's both a means of trying to keep the street alive but also trying to keep morale going. UM. That's why we hear this phrase repeated so often. It reminds me a little bit of like almost I think it's almost twenty years ago you had you know, dot com mania that gave way to this ginormous bust in two thousand and one, two thousand and two. Is this two thousand for tech and crypto? I mean for some sectors of the tech market. Absolutely, it's it's a hundred percent of bubble this first thing, and then you get companies like Facebook, um, Twitter, Is that what they're going for? Is that the kind of movement that the end raising Horowitz is see here a repeat of that pattern where this is where the really good companies get built. When you know, not just anybody can get money, but but only the best kind of the weeds get separated from the chaff, if you will. Yeah, I think like the I mean, they probably wouldn't like to say that this, this bare market is like the dot com like boom and bust in the the I doubt they'd want to admit just how many companies might go under in this period, and a lot of this this initial like buzz around time to build was happening at the very beginning when we were just seeing prices falling but fewer bankruptcies. Um. But in trying to kind of pinpoint the next big bet, this is obviously the best time for investors to be really thinking about due diligence and making investment decisions that are more predicated on you know, what is the potential revenue of this product, what is the potential profit of this product, rather than um moonshot bets where you're just like, oh, we'll ask to a couple of hundred thousand dollars in this thing and see what happens, and if I lose it, I lose it. It's fine. That's the mentality that you see during a ball market. So if we're operating on the assumption that not a hell of a lot of crypto projects are hugely profitable right now. So the money where is it coming from? It's the see is it elsewhere? What are the vcs doing well? Investment in products so far this year has been falling quite a lot. I think this year in particular is the first year where we're seeing VC gets truly burned by the crypto investments they've made. Probably in previous because they didn't have as much exposure and they were still thinking about segments like tech and engineering and I don't know, like investing in the next robin Hood or Airbnb um, and so there's obviously going to be a lot more caution now around how they can really value the investments that they make. In the last few months or so, we've seen VC investment in cryptso really really plummet. Only several segments are really kind of holding up in that respect, like blockchain gaming, And my my thesis on that is just because those are segments that are more consumer focused, consumer facing, and so you don't necessarily have to be convincing a gamer on their Xbox that the blockchain under this is really going to change the way they do something, and you have to go through these weird technical loopholes to get to the product and make that business successful compared to if you're trying to sell them like a defy landing platform. Yeah. Well, I want to come back to the sort of the taking the VC perspectives. So if I'm Sequoia, I just wrote off more than two million dollars worth of FDx investment, I mean, these are these are the people that these are the smartest people in the room supposedly. I mean, if I am Sequoia and I got burned to that extent, surely you have to be thinking, I Am going to put so much due diligence into my next bet. What do you think is going through their minds right now as they look on this space. Yes, there are probably bargains to be had, but you really want to make sure that you got it right this time, wouldn't you. Yeah, we've definitely even been seeing this before companies like ft X collapsed. So for example, in the UK, the is a really big crypto technology company called Copper which develops systems for those you cans do trading in crypto um so they deal more with the institutions than anybody in retail. But even for them, they started raising their latest funding around late last year, so even when the ball market was still alive UM and they didn't need they didn't really close any funding until part way through this year. And the reason being for that is that investors wanted more due diligence than they wanted to be more sure about the company they were investing in. And even now, when we hear the horror stories about some of the companies that did go bust and the kinds of due diligence they gave to their investors, like one big hedge fund who just gave their investors a single piece of paper with a line on saying we have X amount of money. That's all you need to know. These are the kinds of like horror stories that bcs are now trying to avoid. And particularly with FTX being an industry darling and the way it was UM, it's definitely a lesson learned. But that's not to say is not still money out there. A lot of these vcs have now raised funds that are specifically to invest in crypto UM Yeah andres and Horrowitz Paradigm. These are all funds that have billions of dollars of capital ready to deploy just for crypto investments, and so to a certain extent, yes, they'll be more careful about how they do it. Maybe the pace of investing will slow, but the money is still there and still needs to be spent somehow UM, and so that's why we'll still continue to see at least some form of industry going forward. The original vision here was, Hey, we're going to build a more fair and transparent alternative financial system for the little guy. And then you look at this year crypto lenders getting wiped out, FTX getting wiped out, you know, people with tons of money on these platforms frozen locked in UM. Are we then walking away from that or is that just kind of like put on hold for now? Where do you see that going? There's obviously still a little bit of development happening in the in the realm of crypto and wanting to become the next banking system or payment system, because there are still very large companies who sole ethos is to make that happen. If we think about companies like Circle, for example, which issues the the usdc UM stable coin UM, that's a company that is very clear in its dreams and wants to be, you know, not necessarily a bank, but a payment rail that everybody can rely on and use their token the same way you might spend just with like contactless payments in a shop. Um. But just because those are in existence doesn't mean that that the mission is going smoothly, and it's even going to go any faster, and particularly now that we have regulators coming on the scene and taking even harsher looks than we thought were. I mean, we were looking pretty clearly at crypto before, and now it's even more intense. Um, it's going to be even tougher for a company to convince the SEC or the CFTC or the Federal Reserve that these are products that they should allow within that regulated sphere. And then you have Neil Cascari from the the FED, the New York Fed um with his tweet on Friday basically crypto is pointless. You know, when you hear that from a FED official, I'm guessing. I mean, my thinking is you're not going to again. You know, like these are pretty strong statements there. There is no point in this, basically is what he said. It has failed all the the functions that it was supposed to serve. It has failed in I mean, if you're a bank again, what are you thinking? Yeah, I think in the in this time in particular, what we hear from regulators most often is that crypto itself has proven that it has very little intrinsic value and so therefore it should be treated as a speculative asset that it is, and you should be prepared to lose all your money. But there is still this idea that perhaps blockchain technology distributed ledger technology has some kind of benefit benefit for banks in future. That depends on where you are. So for example, in the UK, we have a very good, faster payment system and so the appeal of something like instant payments with blockchain doesn't necessarily work out for us because we already have that. But in the US, where banking systems are quite slow, they take a lot of time. There has to be a lot of intermediaries. That's still a massive cell, and that might be why we see in the coming months and years um a lot more attention on things like Central Bank digital guarantees, where the FED can access all the benefits of blockchain but control it all within itself. Unfortunately, the track record of the FED is to do everything very slowly, so who knows when they will actually arrive. We'll be right back with m and Nicole for more on the crypto rebuilding process. All right, then, so let's turn to the eight hundred pound gorilla in the arena, Finance, or rather their CEO. What are they or what is he? What is he z? What is he up to? He's up to quite a lot of the minute, actually, I mean by the time this podcast episode comes out. Who knows whether what I'll say or will be outdated. Um, But from what we've heard from him so far, he is fast becoming the savior of the industry, or at least that's how Finance is positioning itself. There is potentially a rescue fund on its way for crypto projects that are ailing sea. You've talked about launching a crypto recovery fund. Where are you on that. There's being back and forth on how to structure that. Do we make it at a loose fund or do we make it an actual fund fund. I think we're kind of going with a loose approach where in a different industry players will just contribute. Um. We've also reported at Bloomberg that Binance was in discussion is at least for helping out Genesis with its one billion loan that it's after UM. Not yet clear whether Binance will actually participate in that, but in all areas, it seems finance is keen to portray itself as the the one exchange that is healthy, the one exchange that is is still there for investors um, and the one exchange with all the money to put the bill for things like this. And we warned this about actually FDx back in the summer and all the investments that sand bankwin Freed was making. The problem is when you have one company that is becoming that lender of last resort type of investor UM, the anti competitive behavior in that is quite striking. You might end up having a real true monopoly on your hands, especially in an industry where there is no regulation at present, and so there is nobody to step in and say no, you can't do that, sorry, yeah, And and so now like the biggest player, the giant player in this industry becomes essentially the gatekeeper, if you will. Although c said has been trying to, I guess, strike that balance between centralization and decentralization, but his pictures also to what you were speaking about before. His pictures also this idea of Hey, there are a lot of small promising projects plodding away out there. We might not know who they are, but they're good and they have sound technology. They're just short of cash. Is that is that sort of like is that a reasonable proposition right now? I guess it is, with VCS kind of being a little bit stingy. Yeah, I mean, obviously I wouldn't profess to know much about how much due diligence finance does on its investments, and he did make it very clear that the kinds of companies that he would be willing to back through this rescue fund would be ones that are, for example, profitable, which should mean that they should already have some kind of provable business model UM, which is actually something that's quite difficult to achieve in crypto sometimes. But the main issue with if if that does push your head is that, um, if finance then ends up being the one that holds all the cards, does that mean that finance holds a monopoly not just over you know, where investors are training as an exchange, but also in the technology that might be underpinning everything else. Um. And additionally, on top of that as well, you know a lot of these times, we've seen finance and others come out and say yes, we're going to invest in this company, We're going to save that one, and then a few days later, like we saw the FDXT, the deal falls away, nothing happens. And I guess in crypto the thing to be wary of is people flashing about the money and saying we have this much around to invest in companies, or we're going to save that one, We're going to save that one, um, and actually that not happening in the end. But now it's all about trying to build things that can either make those more palatable to a general audience, so improving the user experience um making it more easy to have a crypto wallet, for example, Or it's things about just trying to use crypto incentives, crypto technology, blockchain, etcetera. As underlying they is to improve general appetite products. So you know, maybe we'll see something like an Airbnb on the blockchain one day. That would be fun. I'm not really sure there's a use for it, but you know that's the goal. Well, I guess, I guess you know. The If there is one thing that history teaches us is these as we talked about in the start of this conversation. Um, you never know at the time at times zero, I guess that's where we are. We're sort of it feels like we're time zero now, where the industry is doing its best to wipe itself out and we're in this. We don't know what it's going to look like. But there might be something we didn't know in two thousand and two that there was going to be appetite for something like social media friends, and we might just we might just not have guessed at what the application where the real killer application is here? Is that fair to say? Yeah? But then if we think back to what I was saying earlier about how vcs have less of an appetite now, the moon shot be that that is the problem. I guess. In order to be able to predict what it is that might be the next version of social media, you have to have a fairly high risk tolerance for making bets that may not pan out. Um. And if anything, actually, even if we look outside of crypto and look at Facebook changing its name to Mesa and all the investment that they've put into the metaverse so far, um it has it has yet to pay off. I mean they won't shareholds of that. They said that we don't expect this to really be something that you'll actually see any profit from for several years. Yeah, I don't see myself hanging out in the metaverse just yet. Um, but we can sort of finish at that thought. They well, Web two started with Facebook. Well, well, Web three start with meta And I think that that is a topic for another time. But I guess the future will tell and we're going to be here to cover it, aren't we A many indeed, Thank you, Thank you. Can find more of mny colts reporting on the Bloomberg terminal and on Bloomberg dot com. For more, be sure to check out twice weekly newsletter Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heeart Radio. For more shows from I Heeart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky Verglina. Our senior producer is Janet Babin. Our producers are Mohammed Farruk and Sharon Burriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidran. I'm Stacy Maria Shmael. We'll be back tomorrow.

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