Crypto DeFined: Value Investor Mike Alfred Talks FTX and Other Red Flags in Crypto
Before FTX went belly up, tech entrepreneur and value investor Mike Alfred predicted that Celsius Network and BlockFi would collapse. He made that prescient prediction last year. Both companies have since filed for Chapter 11 bankruptcy protection.
Alfred thinks it's just a matter of time before others go bust.
Some of the companies most at risk, he predicts, are those that are lightly regulated and have opaque business practices, including balance sheets that aren't fully audited.
With nearly 118,000 followers on Twitter, Alfred is a closely-watched prognosticator. And for good reason: Alfred is an experienced business hand, with two startups under his belt and investments in crypto firms Swan Bitcoin and Bitwise Asset Management.
On Dec. 1, Alfred spoke with Crypto DeFined about the FTX implosion and its broader implications. He also opined on his concerns about Binance, Crypto.com and stablecoin Tether.
Five takeaways from Alfred’s interview (edited for clarity):
-- Crypto collapses were preceded by sloppy practices: Crypto firms became greedy, and because of their “reach for yield, they did these increasingly sloppy arbitrage trades,” Alfred said, adding: “The more shady, scammy and fraudulent operators are allowed to exist, the worse it’s going to be for people coming in."
-- Binance's accounting practices are opaque: Binance, which says it is committed to transparency, is conducting an audit to show proof of reserves. Even so, Alfred says “the key point is that there is no audited balance sheet to date, despite billions and billions of dollars in customer deposits." Also, he notes: "There is no domicile where they can be held accountable."
A Binance spokeswoman did not immediately address Alfred's points. But Binance founder Changpeng Zhao — widely known as CZ — tweeted on Nov. 28th: “If you thought a fraudster is legit, you probably are already poor. But ... if you believe FUD (Fear, Uncertainty, Doubt) all the time, you will also likely be poor.”
-- Tether stablecoin may not be so stable: Despite promising for five years to release a full audit of the reserves backing the world’s largest stablecoin, Tether, known as USDT, has yet to do so. The lack of an audit is concerning to analysts because USDT is a linchpin of the crypto industry, allowing funds to be moved from traditional financial markets into crypto. As of June 30, Tether and its subsidiaries had about $66.4 billion in consolidated assets and $66.2 billion in liabilities, according to a report by BDO.
If USDT collapses, Alfred warns, it could create “mass panic in the ecosystem. People will be trying to dump Tether but they will also be dumping any other risk tokens. That pressure … is going to be enough to take down some of the exchanges.”
Tether didn’t respond to requests for comment. But the company has said its tokens are “100% backed by reserves, and the assets that are backing the reserves exceed the liabilities.”
-- Red flags at Crypto.com: The exchange has recently released statements attesting to its strong revenue stream and healthy balance sheet. Alfred, for his part, is unimpressed. "The only thing I care about is whether they can prove they're holding customer assets one for one in the same denomination that they were deposited in.”
A Crypto.com spokeswoman said the company is finishing its second year in a row with more than $1B in revenue. Additionally, she noted, the company has more than 70M users worldwide and a "strong" balance sheet.
In mid-November, Crypto.com CEO Kris Marszalek said in a livestream that the exchange is conducting an audit of its proof of reserves. Unlike FTX, he added, “we are very conservative and we like our business to be simple.”
Alfred counters: Conducting audits and providing proof of reserves going forward doesn’t make up for years of not furnishing this information to the public. Not having a system in place raises a “huge red flag” in his mind, because, Alfred points out, this “would never fly in the traditional finance markets.”
-- Bullish on bitcoin: Alfred believes bitcoin will find its bottom between now and the end of June 2023. Bitcoin, he predicts, “could easily go to $10 trillion (in market cap) just by subsuming some portion of the gold demand as a store of value.”
Before that can happen, however, some house cleaning is needed. Says Alfred: “I don't think the next bitcoin bull market can start until the bad actors are … swept off the floor." Once they're gone, he says, "we can rebuild and plant new roots in healthier ways, hopefully with less leverage" and better governance.
Watch the replay here.