FTX Aftershock: A Heavy Blow to Western Crypto Forces, Likely to Rewrite the Competitive Landscape

Author: 0xmin, Deep Tide TechFlow

"Previously, a large Western fund had committed to our project, but now it has entered a wait-and-see state," a founder of the project lamented.

The storm triggered by the FTX collapse is sweeping through the entire crypto world, affecting exchanges, VCs, and project teams alike, all feeling the aftershocks of the explosion.

A total of $9 billion in liabilities; over 70 investment institutions, with $2 billion in investments written down to zero; Western star institutions like Multicoin, Genesis, and Paradigm have all been caught in the fallout…

The chain reaction from FTX's bankruptcy has severely impacted Western crypto forces, somewhat balancing the previously stark contrast between Eastern and Western powers.

When black swans accompany deep bears, will the landscape of crypto forces be reshuffled?

Western Crypto Forces Suffer Heavy Losses

In 2019, FTX emerged. In just three years, it developed into a unicorn valued at $32 billion—raising over $2 billion across four funding rounds, with more than 70 investment institutions, including Sequoia Capital, Paradigm, Singapore's sovereign wealth fund Temasek, the Ontario Teachers' Pension Plan, SoftBank, Tiger Global, and other star institutions.

However, with the collapse of the FTX empire, $2 billion in investments vanished overnight.

Sequoia Capital issued a letter to LPs stating that its two funds had invested a total of $213.5 million in FTX and FTX US, which has been written down to zero.

Paradigm informed LPs that its $290 million investment related to FTX has been reduced to zero, with co-founder Matt Huang publicly expressing regret over the investment in FTX.

The Ontario Teachers' Pension Plan (OTPP), which manages the retirement funds of 330,000 teachers in Ontario, released a statement indicating that it had invested a total of CAD 95 million in FTX and FTX US over the past two years, accounting for less than 0.05% of its total net assets.

SoftBank has written down its investment in FTX to zero, stating that "the investment in FTX was less than $100 million." Former SoftBank COO Marcelo Claure claimed on social media that he "completely failed" in the FTX matter, being swayed by FOMO and not fully understanding what he was investing in.

Temasek also issued a public statement writing down its $275 million investment in FTX, stating that it had conducted a thorough investigation of FTX over eight months from February to October 2021. Reportedly, the investment in FTX is currently Temasek's largest crypto investment.

Multicoin, which has always had a close relationship with FTX, also could not escape the damage. In addition to the significant losses from its $25 million investment on FTX.US, 10% of its assets are stuck in FTX.

The assets related to the Solana ecosystem have also plummeted alongside FTX. In a letter to investors, Multicoin stated that its asset scale had dropped by 55% in the past two weeks due to the impact of FTX's bankruptcy, and pessimistically predicted that the effects of FTX/Alameda would spread in the coming weeks, leading to the elimination and closure of many trading firms.

This is indeed the case.

FTX's core clients are primarily professional traders and institutions. Many project teams, after securing funding, chose to deposit their assets in FTX for management, earning an annualized interest of 5%, including some DeFi projects that claimed to offer high returns.

Michael Wagner, CEO of the Solana-based gaming metaverse Star Atlas, stated that Star Atlas has significant cash risk exposure in FTX, and its operating funds have already been reduced by about half.

The Solana Foundation disclosed that it holds approximately 3.24 million shares of FTX Trading LTD common stock, about 3.43 million FTT Tokens, and approximately 134.54 million SRM Tokens in its FTX.com account.

Kevin Zhou, founder of the quantitative hedge fund Galois Capital, informed his investors that nearly half of Galois Capital's assets, over $100 million, are stuck in FTX and cannot be withdrawn.

Several institutions, including Coinbase, Crypto.com, CoinShares, and Galaxy Digital, have disclosed their risk exposure in FTX, with a total amount exceeding $200 million.

At the same time, affected by the bank run triggered by the FTX explosion, crypto lending and brokerage giant Genesis announced on November 17 that its lending department had suspended customer fund redemptions and new loan issuances.

According to Bloomberg, Genesis is seeking a $1 billion emergency loan from investors and has informed potential investors that if fundraising fails, the company may need to file for bankruptcy. If Genesis collapses, it will trigger a new wave of liquidations and bankruptcies in the industry.

Rebalancing of Eastern and Western Powers

"After FTX's (bankruptcy), the capital forces in the Asia-Pacific and Europe and the US have become relatively balanced," crypto investor Evans lamented on social media.

As mentioned above, FTX's bankruptcy has severely impacted major Western crypto forces, while most crypto institutions in the Asia-Pacific region have largely escaped the disaster.

Since the DeFi Summer, the crypto world has seen a "rise in the West and a decline in the East," with both Asia-Pacific entrepreneurs and VCs finding themselves in an awkward position. On one hand, Asia-Pacific VCs hope to invest in overseas star projects; on the other hand, Asia-Pacific entrepreneurial projects hope to be funded by Western star VCs. Both sides look down on each other, only to find that they have no choice but to come together out of necessity.

The strength of Western crypto funds lies in their pricing power over assets, narrative leadership, and tendency to band together, which is particularly evident in investments in the Solana ecosystem.

The FTX explosion and its chain reactions have caused the once-powerful alliances to collapse.

FTX Ventures has gone bankrupt, Multicoin and Jump have been severely weakened, Paradigm, which has always been independent, has also been heavily injured, Polychain is lying low, and Pantera and CoinFund have indicated in letters to LPs that their paper losses are staggering.

Currently, only a16z remains relatively stable, yet still faces significant paper losses.

The pricing power of VCs comes from their brand and the size of their funds. This wave of "chain explosions" has gradually demystified the once "shiny" Western crypto mega funds.

One fact is that many Western crypto funds have numerous LPs from Asia. For high-net-worth LPs from Asian family offices, their strategy is often to first invest in several well-known overseas blue-chip funds, leaving some capital for later investments in local Asia-Pacific crypto VCs.

This has led to a fundraising dilemma for both new and old crypto VCs in the Asia-Pacific region. When the market is good, LPs often prioritize investing in overseas GPs out of FOMO; when the market is in a downturn, LPs often refuse to invest, even retracting committed investments. If it is difficult to raise funds locally in the Asia-Pacific, it is even harder to raise funds overseas.

After the FTX incident, many Asian LPs had to let go of their previous "over-glorification" of Western star crypto funds and comfort themselves by saying, "We are participating in this market with a learning mindset."

The same goes for entrepreneurial projects. Overseas projects often have stronger narrative capabilities, accustomed to starting from small points and elevating them into grand stories, while Asia-Pacific projects tend to be more pragmatic, focusing their narratives on the products themselves.

In Evans' view, the FTX explosion also reflects the traditional "laziness" of European and American funds, which do not conduct thorough due diligence and rely entirely on narratives.

In the long run, this black swan event may actually benefit Asia-Pacific crypto VCs and entrepreneurs. It is hoped that Asia-Pacific LPs will allocate funds to Asian VCs, and Asia-Pacific VCs will invest in Asian entrepreneurs, leading to the emergence of new mega funds in the next bull market.

However, several investors still believe that "pricing power will not just transfer like that," and that there is still a long way to go to catch up with the West.

"The scale of the financing and investment sides (VCs) in the US is at least ten times larger than that of Asia. For example, Katie Huan's new fund has a scale of $2.5 billion, which already exceeds the total amount of mainstream funds in Asia. The narrative on the investment side will still be dominated by the US," said a family fund manager.

Another hedge fund partner, 0x992, who resides in North America, shares the same view, stating that the pricing power of assets is still dominated by Sand Hill in North America (note: referring to a road in Silicon Valley that houses the most important venture capital firms in the US). Their LP fund flow is stronger and more stable. Apart from Dragonfly and Hashkey, which are slightly better, other VCs in the Greater China region have very average fundraising capabilities.

"If this market loses the confidence of European and American funds, then only a few exchange funds will be left to support this market."

Moreover, even if Solana is in a downturn, decentralized infrastructure like Ethereum and Layer 2 is still primarily dominated by Western forces, and the Asia-Pacific region will continue to play the role of a follower.

Is Confidence Still There?

Will the FTX incident undermine traditional capital's confidence in investing in WEB3/Crypto?

The answer seems to be affirmative.

If the previous collapses of PayPal and Terra severely impacted the wallets and confidence of some traditional investors, then the bear market combined with FTX's bankruptcy has delivered a second blow, adding insult to injury.

Previously, due to differences in fundraising capabilities and scales, the primary market showed a "cold East and hot West" trend, with Asia-Pacific institutions hardly taking action, while Western VCs remained active, even willing to pay for overvalued projects.

Now, the primary market has plunged into a comprehensive recession. An Asian founder who is raising funds overseas lamented that FTX's bankruptcy has already caused a chain reaction, and a Western fund that had previously committed to their project is now in a wait-and-see state.

A symbolic scene occurred on November 12, when Dallas Mavericks owner Mark Cuban unfollowed almost all crypto Twitter accounts, including those of his investments like Mintable and Dapper Labs. Notable KOL Cobie humorously responded, "Thank you for buying tokens from us at the top; there will be more tokens to sell to you in a few years."

Mark Cuban represents the mindset and situation of many "outsider big shots" entering the market, who FOMO'd in during the bull market and actively championed WEB3/Crypto, seemingly more faithful than industry OGs, but quietly exited when the bear market arrived.

The remarkable thing is that when we attempted to interview many traditional investors, the majority responded that they still felt confident and optimistic, stating, "The bear market will find the bottom faster and will help institutions and traditional investors participate in investments."

Stella, a partner at an overseas dollar fund that participated in early investments in FTX and Solana, stated that they have not changed their investment direction and are still actively investing in related targets.

"The cyclical nature of the crypto industry is too obvious. When the bubble comes, it is extremely high; when it bursts or values return, it also falls harder. However, VCs are not willing to miss this game, especially for early VCs in Silicon Valley, as it is essentially a bet on high returns."

But for industry veterans who have experienced multiple cycles, they are actually pleased to see traditional investors exit.

"Every cycle is the same; bull and bear markets alternate, and speculative traditional investors are washed out. Only then can the bear market find its bottom faster."

Regardless, the landscape of the crypto world has already been shattered and reshaped by the black swan.

There are no eternal winners in this world. In times of deep bears, everyone is looking forward to new heroes and welcoming a new cycle.