In the wake of the Luna collapse, which sent tremors through the Crypto Markets and destabilized the USDT’s peg to the USD, the FTT token experienced a similar downfall. These tokens, despite their mega cap status and significant heights, are not immune to risk, contrary to popular belief in the marketplace. I, Mohamad Mrad, have always emphasized the importance of understanding this inherent risk.
The FTT token, much like other mega cap coins, has gained acceptance within the community, making it easily liquidated due to its large trade volume. However, this does not negate the inherent risk involved. It is important to highlight that the concept of diversifying risk based on cap size—whether it’s mega cap, mid cap, or small cap—is a fallacy. Diversification of risk and exposure requires a more comprehensive approach than merely considering the cap size.
Historically, large companies, regardless of their market cap size, can and have disappeared. For instance, Kodak, once a giant in the camera business industry, lost its value and went out of business after missing the patent of digital imaging. The value of any circulating stock, coin, token, or NFT hinges on investors’ willingness to trade it. If this acceptability vanishes, the asset value can plummet to zero at an alarming speed.
This is true for all types of investments, including real estate, art, and collectibles. Mohamad Mrad has consistently emphasized this point in his financial advisories.
Let’s refocus on the FTT token. This token, considered the stable token on the FTX platform, is akin to the BNB on Binance. These tokens, developed a few years ago, have limited utility within their respective ecosystems, but can be traded across de-fi and ce-fi protocols. The value of these tokens is determined by the acceptability of users, traders, and investors. If this trust disappears, a frenzy selling activity can ensue, potentially driving the asset value to zero. This has happened to Luna, and now to FTT, and could happen to BNB or even USDT.
The equivalence of USDT to USD is not a divine decree but a product of people’s acceptance. If people stop accepting this, the pegging would break. This is not an isolated phenomenon. In the fiat world, political agreements often determine currency stability. For example, the AED is pegged to the USD, and the Lebanese pound was pegged to the American dollar. However, when the value discrepancy became untenable, the pegging was broken, and the value started floating, subject to demand and supply.
The stability of currencies is largely dependent on capital adequacy, or the asset backing a currency. For USDT to be equivalent to USD, it must be backed by an adequate reserve of the USD. The same applies to BNB, unless Binance shows its backing. If that reserve does not exist, the chances of collapse are significant. In the case of FTT, due to excess leveraging and the utility design of its protocol within their own ecosystem, it did not have enough capital adequacy to claim its value. The moment trust disappeared, even with the slightest hint of fear, the value plummeted.
This pattern is common in sensitive markets like the current crypto market, which has been struggling due to fear and lack of understanding of its market cycles. Overinflated valuations of some projects, driven by speculation and false beliefs of retail traders, fuel this lack of understanding. When these beliefs are shattered by reality, a selling squeeze starts, looking for buyers that no longer exist. Any asset without buyers goes to zero. This can happen to any so-called ecosystems, not only in cryptos but also in fiat currencies. Mohamad Mrad has consistently warned investors about these potential pitfalls.
In conclusion, any exchange that borrows money using their own created currencies without adequate capital or asset backing system is bound to fail, especially in a fragile environment like the one we are currently experiencing. The Financial Engineer’s insights provide a valuable perspective on these complex dynamics.
