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Crypto firm Multicoin says contagion fallout from FTX will continue

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

Jakub Porzycki | Nurphoto | Getty Images

Crypto firm Multicoin Capital said in a letter to investors on Thursday that FTX’s collapse and the industry’s price declines have pushed the fund down 55% this month, adding that the market is poised to get worse before it recovers.

Multicoin said there is a chance the firm will recover some of its funds from FTX, but because those assets are now wrapped up in bankruptcy proceedings, it expects to mark them down to zero. It’s a sharp turnaround 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 far 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 firm said it was able to retrieve about a quarter of its assets from FTX, but the money still stranded there represents 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 are “outside the capital tied up on FTX”. Coin base or in self-storage wallets.

“The fund currently has no assets exposed to any other counterparties,” Multicoin said. “Going forward, we expect some diversification of custody exposure – with Coinbase expected to remain our primary custodian – and will resume trading with other counterparties as we continue to evaluate the current market fallout.”

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

Multicoin said it doesn’t expect the crypto market to turn anytime soon. That’s because there are more crashes to come that will result from the sudden failure of FTX and sister hedge fund Alameda Research, both owned by Sam Bankman-Fried. Both entities entered bankruptcy proceedings on Friday.

“We expect to see contamination fallout from FTX/Alameda over the next few weeks,” the letter said. “Many trading firms will be wiped out and shut down, putting pressure on liquidity and volume throughout the crypto ecosystem. We’ve already seen several announcements on this front, but expect to see more.”

As other companies with assets tied to FTX try to raise emergency funds, “we are looking to buy distressed assets at attractive valuations,” Multicoin added.

Multicoin took another big hit with FTX’s failure due to its solid position in the Solana token. Bankman-Fried was a big booster of Solana, and Alameda was a big holder of the coins. That association led to a 64% drop in the value of Solana in the last 12 days.

Multicoin said it maintains its position and continues to believe in Solana, in part because the cryptocurrency has “one of the most vibrant developer communities.” The crypto market has experienced several pullbacks in the past few years and has bounced back.

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

Multicoin concluded by saying that just as Lehman Brothers did not kill banking and Enron was not the death of energy companies, “FTX will not be the end of the crypto industry.”

“As leverage is removed from the system, we expect to see green shoots next year,” the letter said. “We know that 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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