What the F(?TX)
Notes on Sam Bankman-Fried's FTX crypto exchange
Howdy folks, let’s get started with a graph of FTT (the FTX token) charted, not against USD, but, against ETH (a hip way to chart tokens on Pinotio.com!):
There aren’t many tokens that have gone up versus Ether in the last 180 days, aside from Bitcoin and Ethereum Classic (ETC), but FTT is one of them!
What is FTT?
FTT is a token created by FTX (the crypto exchange company founded by Sam Bankman-Fried) that - among other things - earns 33% of the exchange fees on FTX’s exchanges. I say “earns” because exchanges fees are used to buy back FTT tokens weekly on the open market and then burn them - known as buy-back and burn.
FTT tokens have no control over FTX the company, but they offer some other benefits to holders, such as reduced trading fees and some free withdrawals on blockchains including Ethereum.
How much is FTX worth - in private markets?
First off, there are a few FTXes. There seems to be FTX international (non-US) and then FTX US - for the US market. (There’s FTX EU, but I think that’s part of international in terms of ultimate parent owner, I’m not sure).
FTX non-US seems to have raised funds at a $32 billion valuation in 2022, while FTX US seems to have reached an $8 billion valuation early in 2022. Naively adding those two together would put FTX overall at a $40 billion valuation.
For comparison, Coinbase had a market cap of about $11 billion upon closing today. Granted, that $40 billion for FTX was in January, so it’s probably different today (different lower because of the market downturn OR not so different because FTX is trying to be Berkshire Hathway bailing out the industry… I’m not sure). I understand that FTX was still raising funds in the second quarter of 2022 - I assume at a similar or higher valuation - so my guess is that the FTX private market valuation is not too far off $40 billion, at least for now.
Worth noting that FTX isn’t a small player. By some measures (such as BTC-USDT volume in May 2022), FTX is bigger than Coinbase. However, much bigger than both FTX and Coinbase is Binance!
Conor Ryder has a great overview of FTX in this blog that compares Coinbase and Binance too. Of worthy note is that Coinbase charges much higher fees than FTX for exchanges: 0.5% compared to 0.1% or less on FTX. In one sense, this is an advantage for FTX as they can grab market share. On the other hand, Coinbase makes more money per unit of volume traded.
What might the FTX valuation imply about the value of FTT?
Very optimistically, given that FTT earns 33% of the exchange fees that FTX does, we could value all FTT tokens at roughly half of what FTX is worth. Assuming FTX US contributes exchange fees to the buyback and burn of FTT (which I’m unclear about), that would have FTX’s value at $40 billion (as per news reports cited above), and potentially imply FTT’s market cap should be $20 billion.
The actual market cap of the FTT token is just above $4 billion at the time of writing - according to https://ftx.com/ftt. This is below the optimistic estimate of $20 billion and makes sense directionally.
What does the rate of FTT token burning tell us about FTX’s exchange fee revenue and valuation?
FTX exchange fees (and some other fees) are used to buyback FTT token every week and burn those tokens. Over the past few months, there have been about $4 million worth of FTT tokens burned each week (very roughly). This implies an annualised revenue from exchange fees of about $600M ($4M per week x 52 weeks per year / 33% of fees going to FTT). That’s quite a lot of fees given how low the exchange fees are on FTX.
If FTX is valued at $40B (again, I don’t know if FTX US fees also flow, in part, to FTT token burns), then the revenue multiple for FTX is around 66X based on annualising performance in recent months. (actually the multiple is higher because one should subtract a portion of those earnings/revenue that goes to FTT).
Now, given exchange fees don’t have much fixed cost (FTX costs are mostly fixed costs of operating servers, meeting regulatory requirements, and employee costs - and there are few employees relative to Coinbase or other exchanges), this revenue multiple is maybe not that far from an EBITDA (or potential EBITDA) multiple.
Coinbase, by comparison, did about $7 billion in revenue in 2021. FTX revenue isn’t public but I’m guessing - partly based on the numbers above - that it is lower but growing more quickly (and Coinbase, as mentioned in Conor Ryder’s article, has a lot more employees and costs).
FTX/SBF as Berkshire Hathaway, eh no!
To a degree, FTX has been bailing out parts of the crypto industry as Berkshire Hathaway helped bail out Goldman Sachs during the Great Financial Crisis. Perhaps FTX thinks itself sufficiently big that it benefits from the externalities of preventing a liquidity crises in crypto (a “big tech thinks like a state” kind of hypothesis that Byrne Hobart writes a lot about). Here’s an epic quote from Sam Bankman Fried in Forbes (also referenced in the Ryder blog):
“You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers”
The thing is, FTX isn’t really like Berkshire Hathaway because FTX isn’t bailing out companies from its revenue/profits, but rather from money it has raised from equity sales (unless I’m wrong, in which case, please comment below). That’s pretty different than Warren Buffet coming with a pile of cash accumulated on his balance sheet from profits.
I don’t see any one big red flag about FTX. Sam Bankman-Fried was (and is) a trader, and probably understands excellently (certainly much better than most people, including me) how market contagion and panic works.
However, a few things puzzle me:
Why did they list US Terra on FTX - the stablecoin that failed? It should have been obvious to SBF and FTX that Terra was fragile in design and would fail? It seems short sighted to have listed Terra just to get the trading fees. (Maybe there’s a utilitarian rationale? SBF is a big fan of utilitarianism.)
Why does FTX promote (and build many of its projects) on Solana when Solana keeps crashing? This seems like an absence of prioritising safety/security. Maybe I’m wrong though. Maybe the winning strategy here is just to move quickly? It seems short-term/trader-like to me and missing the point of crypto, which is censorship resistance + reliability.
My experience with FTX vs Coinbase
I’ve stopped using Coinbase and now only use FTX (although I don’t leave funds on the platform):
Coinbase, after over 6 months has still not approved a business application I filed.
Coinbase, during the June crash, introduced forced whitelisting for withdrawals without any notice - effectively delaying the ability to withdraw for 48 hours.
Coinbase fees are much higher than FTX - as mentioned above.
FTX makes it easy and quick to add funds and withdraw funds. It’s a complicated and slow process with Coinbase, often with delays.
In summary, I’m still long Coinbase stock and FTT token, but I’m not adding to either position at present. Maybe FTX will trash Coinbase, but I think they probably each have some persistent differentiation in user base and geography. I’m not sure it’s a winner take all situation just yet. I was thinking about buying more FTT, but - first of all - it’s not actual FTX stock, and - second of all - the stuff with Terra and (a little less so) Solana puzzles me.
Disclaimer: Obviously FTT token and - much more - Coinbase stock are getting trashed lately, so I don’t invest without expecting I could lose all of my invested funds.