FTX Token (FTT-USD): Don’t Be The Exit Liquidity

It’s been a little over two months since the collapse of crypto exchange FTX (FTT-USD) and a lot has happened. In that time, we’ve had congressional hearings, the indictment of former CEO Sam Bankman-Fried shortly before he was to speak at said hearings, and the repeated assertion from Bankman-Fried through various interviews and social channels that US-based customer assets should be safe.

Current CEO John Ray, who has taken over the entity to oversee bankruptcy, hasn’t ruled out the possibility of rebooting FTX. Wild times. According to the Wall Street Journal, relaunching FTX is something that’s actually being considered:

Everything is on the table. If there is a path forward on that, then we will not only explore that, we’ll do it.

As a result of this renewed hope that FTX could reach a modestly positive outcome for some people, the FTT token associated with the FTX exchange has caught something of a bid, up 45% from $1.73 on Wednesday to $2.50 at one point on Thursday.

FTT is still a far cry from the $5.43 it commanded when my last article covering the token was published. But the degenerate behavior in FTT right now is very on-brand for a token representing a bankrupt exchange that not too long ago was described as having “a complete absence of trustworthy financial information.”

Why Exchange Tokens Exist

The FTT token itself is a simple utility token for an exchange that’s bankrupt. What value could those buying FTT on this rip possibly see in FTT? Occam’s razor would suggest this is nothing more than gamblers trying to capitalize off a narrative that has surfaced as a result of a headline. That narrative is the possibility that FTX could do business again one day. And if that’s the case, FTT would possibly have value again as an exchange token within the platform.

I think it’s important to understand what tokens like FTT do to grasp why we’re seeing the action that we’re seeing in FTT today. Owning these exchange tokens generally offers some sort of yield boost on earning accounts or a reduction in transaction fees on a centralized exchange. They’re essentially tokenized versions of centralized rewards programs that can be sold in a decentralized market when the user no longer wants to use the centralized exchange associated with the token. Think of it like being able to cash out your Starbucks (SBUX) stars through a third party when you decide you want to start getting coffee at Dunkies instead.

There’s some credence to the idea that exchange tokens have value at the user level if holding them can create a positive net return on the assets that have been deposited. Having said that, we’ve generally seen investments in exchange tokens fail to generate that positive return. Purely for the benefit of the example – crypto.com (CRO-USD) also has a token that has utility within the ecosystem. That company offers users various yields based on how much CRO has been staked through the platform:

In the example above, you can see it takes $4,000 in CRO tokens to generate $10,530 in USDC (USDC-USD) on a $1 million three-month loan. Users are obviously better off buying short term US treasuries. And again, this crypto.com/CRO exercise is used just as an example. But it works because it’s a similar platform in a similar business and it’s the best we have to go off because so many other crypto yield businesses that offer similar services are also bankrupt. It’s highly unlikely that FTT would be able to generate a positive net return in an FTX reboot in my view. So what’s really happening here?

Don’t Be Exit Liquidity

The reality is anyone trying to scoop up “cheap” FTT is likely doing so without enough information to make a real assessment of any future value FTT could ultimately provide. A bet on FTT today is a bet on four things all happening:

1. FTX does indeed end up getting rebooted
2. Rebooted FTX offers a reward program again
3. FTX uses the old FTT token for said rewards rather than some other mechanism or token launch
4. Users decided to take a chance on FTX again at a meaningful scale despite behaviors of previous management and mountains of bad press. Thus, creating organic demand for FTT.

The problem is, we don’t know if the first bullet point is even happening. This news of an FTX reboot could theoretically be a tactical move by the bankruptcy team to try to liquidate the FTT that it controls at a better price.

As of Jan. 17, the team overseeing the FTX bankruptcy has recovered approximately $529 million in FTT token. This FTT position has been included in what was initially represented as “liquid” crypto assets. The problem with that assertion is that FTT is still a highly centralized token with a top 10 token holder distribution that has actually gotten worse since I last covered the coin – now over 94% of FTT is held by just 10 addresses:

The point is, FTT is liquid in the sense that it can easily be sold at a market price. The question is what is the market for that coin? Without some level of hope that FTT could have utility once again, I’d wager the market for FTT is virtually non existent – and thus, highly illiquid in reality. After the news of FTX’s FTT position was made public earlier this week, FTT first fell from $2.25 down to $1.75 the following day. Justifiably because of the realization that FTX has a large position in the coin and is likely going to try to liquidate it to the degree that it can. Yet here we are with a FTT price back above $2.25. And all it took was a little “hope” that FTX could come back.

Again, if FTX does end up coming back, we don’t know that a future FTX would even be offering anything for holding FTT token. So there might not be any utility on the platform at all for FTT. Furthermore, there’s nothing stopping a future version of FTX from issuing an entirely new coin. And even if all of the just mentioned factors do end up favoring FTT holders, we don’t know that any users would actually come back to FTX again at all. My money would be on the opposite happening.

Summary

From where I sit, this renewed interest in FTX as a viable business entity is odd and I don’t know who it really serves to attempt a revival of a failed company that has such a publicly negative reputation at this point. As I laid out above, I wouldn’t rule out the possibility that this announcement is actually more of a strategic move on the part of the FTX bankruptcy team to try to get some capital out of the FTT token as part of asset liquidations. Don’t be their exit liquidity.