Dec 1, 2021
Secret Weapon of FTX
FTX is a cutting-edge crypto derivatives exchange with a robust and expanding product range. To understand what makes FTX a unique exchange, we must first look at the story behind its creator, SBF.
Sam Bankman-Fried
Sam Bankman-Fried studied physics at MIT before working as a trader at Jane Street, a well-known quantitative trading firm. Jane Street traded $17 trillion worth of securities in 2020 alone. Sam launched Alameda Research in 2017 after seeing the potential of cryptocurrency. Alameda is a quantitative trading firm which has brought Wall Street and Silicon Valley expertise to crypto markets around the world. Soon after, Alameda began to engage in arbitrage trading, earning up to $25 million per day to capitalize on the greater price of bitcoin in Japan compared to America. Shortly after, in 2019, Sam founded FTX, a cryptocurrency exchange, after becoming dissatisfied with the market’s crypto exchanges.
What Makes FTX Different?
Large Volume Clients
FTX serves 2,700 institutional clients and 1.25 million retail users. FTX has a disproportionate share of the large traders, with majority of volume coming from users moving more than $10 million a day. A typical retail client trades $3 million each month, which is a significant amount for retail trading. Retail volume generated $372 billion in average monthly volume, while institutional volume contributed $446 billion. Impressive figures for a platform that was just established in 2019.
Out of 2,700 institutional accounts, three top clients move more than $31.6 billion in monthly transactions. FTX is designed primarily for high-volume traders. Because institutional investors move so much money each month, they expect a high degree of security and dependability, and many consider the FTX exchange to be the most trustworthy exchange on the market.
Three-tiered Liquidation Model
FTX has a three-tiered liquidation strategy, which considerably decreases the possibility of clawbacks, which occur when the insurance fund is unable to pay the overall margin call losses. Only users who have a net profit across all three contracts for the week will be subject to the claw back in this situation. This occurred with OKEx, which was forced to recoup $9 million from other traders when a deal on bitcoin futures went awry.
Cross Margin Collateral
Unlike other exchanges, FTX allows for “cross-margin,” which means that many digital assets are treated as one when it comes to contributing to the user’s overall collateral. The majority of exchanges compute collateral on an asset-by-asset basis. Rules like this are inconvenient for investors looking for leverage.
Tokenized Stocks
Instead of flipping over to Robinhood, investors may benefit from public securities such as Tesla, Alibaba, Amazon, and Apple, which can be exchanged 24 hours a day, seven days a week, as opposed to the traditional stock market, which is only open Monday through Friday.
FTX Pay
Service to accept payments across crypto and traditional currencies.
Leveraged Tokens
FTX was the first to provide this product, which allows you to multiply your asset returns. Rather than maintaining a leveraged position and dealing with collateral difficulties, investors may just buy in a token that is already leveraged. For example, if the price of Ethereum rises by 10% on a particular day, the leveraged token will rise by 30%.
Fees
FTX has the lowest costs among its primary rivals, at 0.02 percent compared to Coinbase’s 0.50 percent and Binance’s 0.10 percent. Furthermore, FTX has no maker costs, which is a game changer for major institutions.
FTX Culture — Speed and Efficiency
Sam BF believes in delegating managerial authority to those who contribute to a given task. This eliminates frequent time waste between project managers at various levels of the organisation. For example, FTX launched a lumber market barely a day after getting customer requests for it. With only 82 people, this enabled FTX to have an efficient business strategy that attracted large trading volume.
All of the foregoing will enable FTX to acquire users far more quickly than its competitors.
Not All About Tech — FTX Global Marketing
FTX made headlines by being the first crypto business to pay $135 million for the naming rights to a major US sports venue, which will be renamed the FTX Arena. In addition, Tom Brady has been appointed as an ambassador for the company in order to promote its smaller US exchange, which provides more traditional products suitable for a more regulated market.
In June, FTX entered the E sports space by spending $210 million for a 10-year sponsorship deal with TSM, one of the most successful teams in E sports and the industry’s most valued organisation.
FTX became the first cryptocurrency exchange to promote major league baseball, with all MLB umpires now displaying FTX patches.
As recently as October of this year, FTX purchased a Super Bowl commercial space to promote cryptocurrency to a television audience of 92 million.
FTX is leveraging massive marketing partnerships in order to become a household name, which will bring additional value to the company in the future as it strives to become the world’s top exchange.
FTX Future Potential
FTX is now the third largest exchange by volume, with daily volume exceeding $20 billion.
Although Binance is the largest exchange today, it remains to be seen if it can keep its top spot. In terms of the future, FTX recently raised $900 million in funding, making it the largest crypto fundraising round in history, with over 60 investors including SoftBank, Circle, and even their main competitor Coinbase Ventures. FTX wants to use the $900 million investment round to grow further into regulated markets by acquiring businesses that are already licensed. The conclusion of FTX’s acquisition of LedgerX signifies an expansion of FTX’s US regulated futures and options products. Furthermore, according to The Block Research, crypto derivatives trade volumes have been approximately $23 trillion this year, with this figure projected to climb as adoption grows.
Sam BF has been praised for developing and building FTX as a reliable exchange in just two years, which can compete with some of the biggest exchanges in the market, donating 1% of FTX revenue to charity. With an estimated net worth of $8.7 billion, Sam BF now has the power to have a significant impact, such as contributing $5 million to Biden’s campaign to become the second largest CEO supporter behind Michael Bloomberg.
Valuing FTX & FTT
The FTT token was designed to be used on the FTX Exchange. It is an ERC-20 token that serves as the exchange’s ecosystem’s main pillar.
FTT coin has a market cap of $7 billion today, compared to Binance’s BNB, which has a market size of over $100 billion. Consider the following efficiency of the FTX business model versus that of Binance:
In comparison to other big exchanges, FTX earns $2.7 billion per head, whereas Binance earns $306 million per head. Given that FTX merely began in 2019 and has already produced about a fourth of what Binance has made since its inception in 2017, this is rather astounding. Furthermore, with increasing crypto adoption and significant institutional money flowing into crypto, it’s conceivable that FTX will skyrocket, maybe dethroning Binance.
Because the FTT token has a limited supply, it is deflationary and will increase in value as utility increases. With that in mind, let’s have a look at the FTT token utility:
- Discounted Trading Fees — One expected utility for any exchange token is discounted trading fees for those holding the token. Of course FTT delivers on this expectations and traders are incentivized to purchase FTT tokens to reduced the trading fees they pay. Trading fees are discounted from 3% to 60% depending on the amount of FTT held.
- Socialized Gains — One of the ways an exchange avoids clawbacks is by funding an insurance account to protect traders in the event of excessive market volatility. FTX has gone even further by instituting a rule that if their insurance fund sees a large increase any FTT holders at the time will receive a bonus payment from the excess insurance funds. This could make FTT similar to a dividend bearing stock if we have another extended bull market run in cryptocurrencies.
- Token Burns — This is one way in which FTX controls supply to increase the price of FTT. FTX uses one-third of the fees generated by the exchange to buyback FTT tokens and burn, or destroy, them. FTX has said they will continue doing this until 50% of all the FTT created have been burned.
- White Label Solutions — This is a method for generating additional income by selling or leasing the framework of their product to others. In this case FTX has stated that they’ve seen quite a bit of interest from other businesses in a white label solution for the FTX futures and OTC Exchange. While it doesn’t seem this would affect the FTT token it could because FTX has said FTT would be one of the payment options if they offer a white label solution. And it’s pretty likely they will offer some sort of discount for white label purchases made with FTT. That could increase demand substantially for FTT if the white label solution becomes popular.
- OTC Rebates — With reported trading volumes in excess of $500 million FTX is one of the largest crypto exchanges in the world, but thanks to their partnership with Alameda Research they are also able to offer an Over-the-counter (OTC) trading platform too. This platform is typically used by high volume investors and traders who don’t want their trades to have an impact on market pricing. Based on information from the FTT Whitepaper these OTC traders receive a rebate if they are holding enough FTT.
- Position Collateral — FTT can be used as collateral on the trading platform, which could increase demand if FTX provides some incentive in the future for using FTT as collateral rather than some other asset such as Bitcoin or Tether.
- Future Plans — FTT is the backbone of the FTX ecosystem. FTT will become even more useful when they add other derivative products to the platform.
With all of this, we believe that the FTT’s market valuation will be close to $70 billion in the next five years, and that the FTT token price will be in the $200-$240 range, depending to fluctuations in circulating supply.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
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