How the Collapse of FTX Could Affect Real Estate
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I’m sure you know by now what happened to FTX, one of the world’s largest cryptocurrency exchanges. On Friday, November 11th, 2022, Sam Bankman-Fried (or, as he’s known on Twitter, SBF), CEO of the exchange, filed for Chapter 11 bankruptcy protection in the United States, liquidating its assets and putting an alleged 1 million+ creditors at risk.
What exactly happened? The story stretches beyond FTX itself: SBF also co-founded and operated a crypto hedge fund named Alameda Research, a trading firm that actively sought out and funded other crypto-based projects in the financial sector.
Long story short, SBF tied both FTX and Alameda into a knot that became nearly impossible to undo, lending money (that is, FTX customer funds) to Alameda to compensate for losses the hedge fund suffered after betting on some less-than-ideal crypto investments.
The lending went both ways throughout the corporate relationship, but ultimately, gaps in balance sheets and suddenly overwhelming liabilities led to FTX’s insolvency, forcing SBF to throw in the towel.
Sound familiar?
FTX & the 2008 Housing Crisis: How Bad Bets Lead to Chaos
The FTT token is FTX’s “exchange token,” or a token you can only purchase directly from that exchange. Most crypto exchanges have their own token that customers can purchase and use to “invest” in the exchange, although token ownership does not lead to any sort of equity in the company.
Instead, customers could buy FTT, then leverage its ownership perks to redeem discounts on trades. Rival exchange Binance even purchased an undisclosed number of FTT token in 2019.
You could draw some loose comparisons between the perceived value of these FTT tokens and the credit default swaps (CDS) that were so popular before the housing crisis: Billions of dollars worth of FTT were sold before FTX’s demise, and billions of dollars worth of CDS were sold before the crash.
Both became nearly worthless when the true value of their underlying assets was exposed: SBF was known for intentionally decreasing the supply of FTT token by millions to reduce float and increase the value of outstanding tokens, and global insurance organization AIG thought CDS were sell-only, plunging themselves into insolvency when it suddenly came time to pay back investors.
Another Direct Correlation Between 2008 and the FTX Collapse
You could think of FTT ownership as its own credit rating: The more people buy it, the safer (and more “triple-A rated”) the asset must be.
With credit default swaps, lenders were essentially saying to investors, “You insure this loan, and in the event that it defaults, we’ll compensate you for the loss.” At that time, though, no one thought that the mortgages they were betting on would default. At all.
With the FTT token, FTX was essentially saying to its owners, “You invest in us with this token, and as long as it’s worth something, we’ll reward you with financial discounts.” I can imagine SBF thought his FTT token would never lose value, nonetheless plummet to near zero.
Both instruments were very legitimate ways of recouping funds for the seller. But, as history has proven, when things get a little too good to be true, they usually are.
You could argue that, similar to those responsible for the housing crisis, SBF, who once had a net worth of about $32 billion, flew a little too close to the sun. To make matters worse, soon after rumors of FTX’s solvency issues surfaced, Binance suddenly sold all of its FTT tokens (an alleged $529 million worth), prompting the start of a major sell-off.
SBF’s Liquidation of Bahamian Properties to Satisfy Creditors
When the words FTX and real estate come together in the same sentence, you can’t leave the Bahamas out. Besides spending millions of dollars in luxury residential properties in the Bahamas for his staff and family throughout 2022, SBF was planning on developing a $60 million corporate headquarters for FTX on the island as well.
Needless to say, experts seriously doubt the project will proceed. Instead, now under the umbrella of bankruptcy, SBF is rumored to start selling off “healthy business units” his company holds in the Bahamas to recoup funds lost from the downfall of his exchange.
Some even say that SBF may be cooperating with Bahamian regulators to dodge his US bankruptcy filings and move remaining assets overseas. Whatever the case, real estate activity in the Bahamas will enter the spotlight thanks to the liquidation of FTX’s holdings on the island.
SBF needs to satisfy his creditors somehow, and it’s likely he’ll attempt to do so with his Bahamian locations. The selling of residential locations that once belonged to FTX staff and SBF’s family will almost certainly affect the luxury residential sector of the island, and similar commercial ramifications will likely follow suit.
What does all this mean for the real estate space?
For one, I think you could argue that lenders will approach loans for real estate developments housing crypto projects with a much larger grain of salt than they once did, similar to how lenders approached the housing market after the crash (minus all the new regulation, which hasn’t really hit the crypto space just yet).
Then there’s the discussion around using cryptocurrency to expedite real estate deals. Property owners, especially in the residential sector, are slowly starting to accept cryptocurrency payments for property titles.
While direct crypto-to-crypto transfers (when funds are both sent and received in cryptocurrency) are still rare, cryptocurrencies can be used as payment to cut out the middlemen (like banks) and close on a property in as little as 24 hours. In a hypothetical world, let’s pretend that, at the height of FTX’s success, someone was saving up for a property in FTT token (which had a market capitalization of nearly $2 billion at one point in 2021) and was planning on using it to buy their parents a new vacation home by the end of 2022.
Yea. Imagine that. Do your research, stay diligent, and happy investing.
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