Consolidation Wave: Why FTX and BINANCE invest billions in problem companies
Against the background of an unstable macroeconomic situation, Terra’s collapse provoked a deep crisis in the cryptocurrency industry.
The number of the largest industry players like Celsius Network and Three Arrows Capital (3ac) went bankrupt, miners faced the problems of servicing loans and access to capital, and a wave of liquidation swept around the market.
Some draw parallels between the current situation and banking panic of 1907. Then a series of unsuccessful decisions of credit organizations caused a stir removal of money with depositors and threatened to collapse the US economy.
In the XX century, the situation was “saved” by John Morgan and other bankers who invested their own funds to maintain an American credit system. In 2022, this role was decided to try on the “titans” of the cryptocurrency industry.
FORKLOG figured out what goals pursue crypto -millionaires, investing in problem companies.
- The 1907 banking panic threatened to collapse the US economy, but collapse was avoided thanks to the efforts of John Morgan and other bankers. At the same time, it was they who became the main beneficiaries of the crisis, destroying competitors and increasing their own capital.
- Terra collapse and a wave of bankruptcy of centralized market participants who followed it created an “perfect storm” for the consolidation of the industry. Successful companies have the opportunity to expand by absorption of weaker players.
- “Savior” act on the basis of their own interests, providing financing beneficial for themselves.
- At the time of writing, there is no reliable information about the specific actions of players who previously declared their readiness to invest in problematic participants in the industry. Exception-Sam Bankman-Fried and companies affiliated with it.
Veil before my eyes
In the first decade of the 20th century, the US economy was on the rise – rich yields, low unemployment, high incomes of enterprises.
1906 turned out to be so successful that American credit organizations occupied about $ 500 million in European markets. Money has been led by corporations who, on the way to mass consolidation, were looking for the possibility of redeeming competitors’ shares.
At the same time, a number of events occurred in the United States that did not affect the stability of the stock market in the best way:
- In 1833, President Andrew Jackson refused to extend the license of the Second United States Bank (Eastkla in 1836), which was de facto lender of the last instance;
- In July 1906, Hepburn Law adopted, allowing the ICC to establish the maximum rate of railway tariff. The act reduced the market value of industry shares;
- In November of the same year, the consideration of the claim against the oil company Standard Oil John Rockefeller began. The latter was accused of violating the antimonopoly law.
The totality of these factors and the approach of corporations to doing business put the financial system in a dangerous position – against the background of the consolidation of the market, the volume of debt load grew up.
The situation was aggravated by banks that formed syndicates for underwriting of companies bonds, which thus ensured their current loans.
Bank panic
Banking panic is a massive withdrawal of deposits from credit organizations in connection with doubts about their financial stability.
The panic of 1907 began in October with manipulations in the copper market. Brother of the owner of the United Copper Company August Hainz – Otto – together with Banker Charles Morse decided to realize the scheme of aggressive buying up shares of the organization.
However, Otto’s plan failed, and his brokerage company GROSS & Kleeberg went bankrupt. Almost simultaneously with this, the State Savings Bank of Butte Montana owned by Augustus announced insolvency.
Depositors began to withdraw funds from Hainz and Fabor of credit organizations.
“Infection” quickly spread to other sectors of the economy. According to the results of October, the index of the New York Stock Exchange collapsed by 58% compared to the peak value of 1906.
In November, the markets began to recover and the aforementioned John Morgan played a key role in this, who not only put part of his own state in suppressing the crisis, but also convinced other bankers to ensure the necessary liquidity.
The strongest of this world
In the context of “salvation” of problematic market players, the founder of JPMorgan & Co. is the most noticeable figure. Some call his role in resolving the crisis of 1907 “almost God -like”.
At the time of the start of banking panic, the house Morganov had a huge influence and a significant reserve of liquid funds. The United States Steel Corporation founded in 1901 was the world’s first public company with more than $ 1 billion.
By 1907, the corporation managed not only the steel business, but also an extensive network of railways. She owned lands, the total area of which exceeded the size of the state of Massachusetts, and over 180,000 workers worked at its enterprises.
“[In 1906] U. S. Steel Corporation paid employees $ 128 million – more than the United States spend on their army or fleet. […] 50 of its mines provide the production of the sixth part of the entire iron ore in the world. […] More steel is produced at its factories than in the UK and Germany – a quarter of global production, ”journalist Herbert Casson wrote about the company.
John Morgan, who at that time was in Richmond, understood that the banking crisis was spreading and soon hesitated and healthy institutions.
However, apparently, he was not excited. As the editor of Harper’s Magazine, Frederick Allen, wrote, on the way to New York, the millionaire “was in a beautiful mood” and “whistled some kind of melody” fervently ”.
Good reason and real reason
Returning to the financial capital of the United States, Morgan united with George Baker (President of First National Bank of New York) and James Stillman (chairman of the National City Bank of New York). They formed the committee in order to determine which institution can still be saved, and which should be sacrificed.
For these purposes, bankers allocated about $ 30 million, including $ 10 million borrowed from John Rockefeller. Capital was used to issue loans to other credit organizations.
At the same time, Morgan launched a series of aggressive M&A-sections. First of all, JPMorgan absorbed Mercantile Trust and six more trust companies and banks.
The millionaire took the opportunity to acquire shares of his competitors, including in the sea, rail and steel sectors. The Campaign’s apogee was the purchase of Tennessee Coal and Iron – a direct opponent U. S. Steel Corporation.
The deal was dangerous to violation of the antimonopoly law (Act Sherman). To complete the process, Morgan turned to US President Theodor Roosevelt, who agreed to close his eyes to the ambiguous situation.
Ultimately, the actions of Morgan and his associates allowed to suppress panic and by the end of the year the country’s economy stabilized. At the same time, the main “savior” de facto turned out to be the main beneficiary of the crisis.
This did not escape the attention of politicians. In January 1913, the Congressman Arsen Puja conducted an investigation and issued a detailed report on JPMorgan.
According to the document, Morgan and a number of other influential bankers received consolidated control over numerous industries and monopolized them. At least 18 large financial corporations were controlled by a consortium headed by JPMorgan.
Morgan, Baker and Stillman personally controlled more than $ 2.1 billion through the resources of seven banks and trust companies. In addition, JPMorgan employees were included in the councils of directors of 112 corporations with a total market capitalization of $ 22.5 billion-at that time the total cost of all shares of the New York Stock Exchange was estimated at $ 26.5 billion.
Despite the extensive evidence base and a large -scale investigation, in the framework of the Pujo case, none of the listed persons was held accountable. It is not surprising that some had an opinion about the artificial nature of banking panic. In the end, Morgan himself said:
“A person always has two reasons to do anything. Good reason and real reason “.
Domino effect
In 1907, the crisis lasted a little less than a month and plunged the American economy into a recession. It is not known how everything would have turned out if Morgan had not decided to intervene.
In 2022, the events developed less rapidly and largely depended on the macroeconomic factors in the digital assets market, and not only on the solutions of specific industry players.
Terra collapse occurred against the backdrop of a local “bull” trend. UST Loss Bindings to the US dollar provoked a liquidation cascade in decentralized services. The final collapse of the ecosystem of one of the largest cryptocurrencies has become a catalyst for a collapse.
The situation is aggravated by the fact of the abundance of Leverja in the industry, to which the players did not pay attention to. According to the head of Binance, Chanpan Zhao, due to the influence of credit funds, the industry encountered a protracted crisis.
He explained that the debt positions of large funds and Defi protocols are difficult to eliminate in a short time. At the same time, such events cause a cascading effect that slowly spreads.
It seemed that the industry is “cracking at the seams”-the bankruptcy of large organizations like 3ac and Celsius undermined confidence in the industry and caused problems among their creditors, and due to the accompanying sales, retail investors and miners were seriously affected.
In a conversation with Protocol, the founder and managing partner of Fin Venture Capital Logan Allin called the situation “an ideal storm that will lead to the consolidation of the entire industry”.
The current position plays on the hands of industry magnates. This is an opportunity to absorb competitors and enter promising markets under the cover of a noble purpose of “salvation” of cryptoeconomics.
Tinder, but it’s ftx swiping left or right on distressed assets
– Tommy Shaughnessy (@Shaughnessy19) June 30, 2022
“Tinder, but only FTX is swinging to the left or right problem assets,” wrote the co -founder of Delphi Digital Tom Schonesses.
The story is not repeated, but rhymes
Sam Bankman-Fried and the associated company FTX and Alameda Research not only announced plans to help problem players, but also reinforced their words with actions.
In an interview with Reuters, Bankman Fried said he has “several billion” to https://gagarin.news/news/chiliz-project-overview/ help firms in a difficult situation. In the first two weeks of June, the companies affected with him spent about $ 1 billion on various transactions.
Bloomberg Has Sorted Out the Acquisition/Investment Targets of Three Major Companies Currently in the Hands of SBF. Three Major Companies are FTX, FTX US, and AlaMeda. SBF HAS Been Buying the Dips this year. https: // t.Co/Sadkui8V4V Pic.Twitter.COM/0L89NAKA2I
– Wu Blockchain (@wublockchain) July 25, 2022
In June 2022, the FTX opened the Blockfi cryptolending platform, which provided services, including 3ac, a renewable credit of $ 250 million. A few days earlier, AlaMeda provided Voyager Digital for $ 500 million.
Subsequently, the American division of FTX issued Blockfi by another renewable loan of $ 400 million, having received an option to purchase a platform for $ 240 million.
Within the framework of these transactions, Bankman-Frida pursued his reason. In the case of Voyager Digital Alameda Research, it turned out to be one of the main debtors of the cryptocrack, and the potential purchase of Blockfi includes the acquisition of not only business business, but also licenses with which it has.
Experts surveyed by Bloomberg noted that as a result of a series of absorptions, the head of FTX may receive extensive control over the industry. In their opinion, this entails the risks of centralization and threatens the “free market”.
“He does this not out of kindness of sincere. Now his ambitions do not know the boundaries, ”said Chris McCan, general partner of Race Capital, who was one of the first to invest in FTX.
The head of the exchange rated the claims, emphasizing that inaction from his companies would put the industry under a much more serious blow.
“The last thing we wanted is the spread of infection. The last thing we wanted was unprotected customer assets, ”he said.
Indeed, the parallels between Bankman-Fried and Morgan suggest themselves. Especially if we take into account the fact that it was Alameda Research that exerted significant pressure on the price.
Sam Bankman-Fried is Doing A Personal (And Personally Lucrative) Bailout of the Crypto Financial System Like JP Morganelly Bailed the US Banking System in the Panic of 1907. … by 1913 The Federal Reserve Was Created as Reaction to this Crisis. https: // t.Co/FMXLYSVQ2Z
– Will Diamond (@wdiamond_econ) June 30, 2022
“Bankman-Fried personally (and with personal benefit) saves the crypto-financial system as John Morgan personally saved the banking system during the panic of 1907,” said Wil Diamond’s finance professor of the Worton Business School.
Be John Morgan
For players with large cash reserves, the crisis is certainly an excellent opportunity to expand the business. Simply because the cost of sector companies has significantly decreased.
OTC Valuations I Receved vs. LAST VALUATION (UNSOLICITED):
+ FTX, Animoca -> 25% OFF
+ Blockchain, Consensys, Kraken, Opensea -> 50% OFF
+ Celsius -> 90% OFF Pic.Twitter.COM/TOPCBC1KLR
– Ryan Selkis 🥷 (@twobitidiot) July 1, 2022
That is why not only Bankman-Fried claims the title of “Savior”-other industry giants also announced the relevant plans.
In June, Chanpen Zhao noted that cryptosima is an excellent time for various acquisitions. In the same month, he stated that Binance is “obliged” to protect users and help survive the rest of the industry participants.
The head of the exchange emphasized that some companies and products are poorly designed, managed illiterate and operated with errors. According to him, more successful ones will be replaced by these projects, and therefore they do not need to save them.
In particular, Zhao criticized the deal of Alameda Research with Voyager Digital, saying that “he would never go to such an agreement”. He emphasized that the loan from Bankman-Frida will not save the cryptorrhea and was right-ultimately the company filed a bankruptcy statement.
SO, 3AC Owes Voyager a Few 100m, Went Bust. FTX/ALAMEDA GIVES 3AC $ 100m, But Didn’t Save it.
Alameda Invests in Voyager, The Takes a $ 377 Million Loan from Voyager … Ok ..
V Went Bust. FTX DIDN’T “Bail them Out” or Return the Money?
In July, Zhao said that Binance intends to help the industry participants who experience a “slight liquidity deficit” and is conducting appropriate negotiations with more than 50 companies.
The billionaire emphasized that his platform does not compete with the FTX, since the latter is more concentrated on the American market. At the same time, from the moment the crisis began, the exchange has not made a single statement related to the purchase or provision of a loan of any company.
The founder of Tron Justin San also announced the readiness to allocate $ 5 billion to the problem participants in the market. According to him, several representatives of the industry have already addressed him – for consultations on potential transactions, he attracted an unnamed investment bank.
However, then no public steps on his part followed. At the end of July, he announced the intention of Tron DAO to acquire the NFT marketplace Huan he from Tencent, which is weakly correlated with the strategy of the “salvation” of the industry.
However, it is worth remembering that San has enough of their problems – only in mid -July Tron managed to restore the binding of the USDD algorithmic stabilcoin to the US dollar. Apparently, now this question worries him more than the rest.
The consequences of consolidation
In a conversation with FORKLOG, the head of the Kucoin cryptocurrency exchange, Johnny Li, noted that the crisis is a great moment to search for ways to jointly improve the industry.
“The cryptocurrency industry is characterized by coexistence and joint creation. This means that cooperation and mutual assistance ensure the general survival of the industry and its participants. […] When the industry encounters a crisis, we look forward to the defense of the responsible builders, and we ourselves are ready to take on this role, ”he said.
However, there is another side of the coin. Companies and their owners pursue very specific goals – are trying to maximize the effectiveness and profit. Therefore, their intentions may not coincide with the ideals of blockchain culture.
“In fact, this [the cause of investment] can only be found out that they have in their heads. But my assumption as a businessman-they buy traffic and user, ”explained Mikhail Chobanyan, founder of Bitcoin-Birzhi Bitcoin Exchange.
Banking panic in the United States and published after the Pujo report led to the creation of the Federal Reserve System. The appearance of such a structure in the digital assets market seems unlikely.
What can be expected for sure is the enhancement of supervision from the regulators. However, according to Liu, “cryptocurrency empires” should not be afraid of antimonopoly claims.
“Whether the company will become the object of antitrust investigation primarily depends on whether it shows signs of monopolistic behavior. No large volumes of bidding, nor a huge number of resources can lead to a monopoly. […] There can be no monopolists in the decentralized industry due to its diversity and dynamism. No one will benefit from the accumulation of influence in the hands of a narrow circle of people, ”he said.
Fears regarding the current redistribution remain. According to Chobanyan, market consolidation entails systemic risks of centralization. At the same time, he noted that these are “natural processes” that would take place regardless of the situation.
“Consolidation is equal to centralization. All the same risks: turn off one – turn off a third of the industry, a quarter of the industry, maybe one fifth. On the other hand, these are natural processes. The monopolization of the market is probably laid in our DNA, ”he said.
Chobanyan added that subsequently other companies will appear that will try to “bite off” the magnates part of the market. In his opinion, there will be a “cycle of companies and influence in the world”.
History clearly demonstrates that during the crisis there are always winners and losers. However, it is early early to judge how the wave of consolidation will end, since we do not have reliable information about the actions of large players.
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