Crypto firm Multicoin says fallout from FTX contagion will continue

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The FTX logo displayed on a phone screen and representation of Bitcoin cryptocurrency are seen in this illustration photo taken in Krakow, Poland, November 14, 2022.

Jakub Porzycki | Nurphoto | Getty Images

On Thursday, venture capital firm Multicoin Capital told investors in a letter that the collapse of FTX and falling prices across the industry had caused the fund to drop 55% this month, and added that the market was about to get worse before it bounced back.

Multicoin said there is a chance the company will recover some of its funds from FTX, but since those assets are now locked in bankruptcy proceedings, it plans to reduce them to zero. It’s a sharp reversal for five-year-old Multicoin, which announced a $430 million fund in July, its third and largest to date.

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“We place too much faith in our relationship with FTX,” Multicoin managing partners Kyle Samani and Tushar Jain wrote in the more than 3,400-word letter, obtained by CNBC. “We had too many assets on FTX.”

In a letter last week, the company said it was able to recover about a quarter of its assets from FTX, but the money still tied up there represented 15.6% of the fund’s assets. Multicoin also said at the time that it traded on three exchanges: FTX, Coinbase, and Binance. Now, 100% of its assets “outside of FTX-locked capital” are on Coinbase or in “multi-sig” self-custody, which means multiple disparate signers are needed to control the funds.

“At this time, the fund has no assets exposed to other counterparties,” Multicoin said. “Going forward, we expect some diversification of custodial exposure with Coinbase expected to remain our primary custodian and resume trading with other counterparties as we continue to assess current market fallout.”

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John Robert Reed, a spokesperson for Multicoin, declined to comment for this story.

Multicoin said it doesn’t expect the crypto market to transform any time soon. Indeed, there are more meltdowns to come that will result from the sudden failure of FTX and sister hedge fund Alameda Research, both of which were owned by Sam Bankman-Fried. The two entities began bankruptcy proceedings on Friday.

“We expect to see contagion fallout from FTX/Alameda over the next few weeks,” the letter reads. “Many trading companies will be wiped out and closed, which will put pressure on liquidity and volume across the crypto ecosystem. We have already seen several announcements on this front, but expect to see more. “

As other companies with FTX-related assets look to raise emergency funds, “we are looking to buy dislocated assets at attractive valuations,” Multicoin added.

Multicoin took another big hit with the failure of FTX due to its large position in the Solana token. Bankman-Fried was a big Solana thruster and Alameda was a major coin holder. This association has resulted in a 64% drop in the value of Solana in the last 12 days.

Multicoin said it stands its ground and still believes in Solana, in part because the cryptocurrency has “one of the most vibrant developer communities.” The crypto market has seen multiple setbacks over the past few years and rebounded.

“Based on our experience in 2018 and 2020, we have learned that it is not prudent to sell an asset during a short-lived crisis if the basic thesis is not compromised,” the company said.

Multicoin concluded by saying that just as Lehman Brothers didn’t kill banking and Enron wasn’t the death of energy companies, “FTX won’t be the end of the crypto industry.”

“As leverage is eliminated from the system, we expect to see green shoots next year,” the letter reads. “We know the builders in this industry and in our portfolio are some of the most dedicated people and they won’t give up. And neither will we.”

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