FTX Trilogy, Part 3: The Everything Exchange

Editor's note: this trilogy was written in August 2021, fifteen months before FTX's subsequent meltdown. We have kept it up to show our thinking at the time, and the view of the broader market. We reflected on the fallout and what can be learned in a coda to the trilogy, "The Casino and the Genie."

You may want to read Part One or Part Two, first. ‍

It feels strange to think that Amazon was once just a bookseller. 

The young Jeff Bezos, a fresh defector from the hedge fund world, had studied a number of wedges before making a decision. Should his online business sell CDs? VHS tapes? 

Books made the most sense. In their durability, portability, and especially variety, they were perfectly suited to be sold over the internet. It proved a sound decision. 

In time, of course, Amazon became something much grander, more expansive. A place to buy almost every conceivable item — an “everything store,” as writer Brad Stone described it. 

If FTX succeeds in maintaining its trajectory, we may look back on this period as the company’s “book” era. Today, FTX is mostly a cryptocurrency exchange, but that might not be the case for long. 

Through conversations with leadership, investors, and crypto insiders — and access to internal strategy documents, The Generalist has developed a picture of a business that sees itself less as a cryptocurrency product, and more as a kind of “everything exchange,” a place to buy and sell, to trade, all manner of assets. Whether such a lofty goal can be reached remains in question. 

In the final installment of our FTX Trilogy, we’ll unpack the four paths the company may pursue to grow its footprint, touching on feature development and M&A. In particular, we’ll discuss:

1. Betting on sports. Why FTX’s sponsorships may herald a greater involvement in the sector.
2. Expanding in crypto. How FTX could bolster its institutional and consumer crypto offerings. 
3. Becoming a bank.  FTX sees itself as a full-stack financial business — what does that mean? 
4. Entering social media. Should FTX buy a social network? It may present the best opportunity to bulk acquire customers and mainstream crypto.

Sports: Playing in the Big Leagues

FTX’s decision to spend upwards of $500 million sponsoring the Miami Heat, MLB, and eSports team TSM, looks strange at first glance. Why would a cryptocurrency exchange fritter the equivalent of a growth round on such generic, targetless marketing? How many higher-precision avenues did the company overlook in favor of blanketing the sports world and its assemblage of fans in lucre? 

If marketing is so often a game of sniping and scalpels, every decile optimized, FTX seems to be stampeding into battle with a shotgun. Indeed, why haven’t more established domestic entities like Coinbase or Gemini made similarly flashy moves? 

It starts to make more sense when you consider that FTX’s approach may be targeted, after all — it’s simply aiming at a different bull’s eye: the world of sports. In the coming years, we may see FTX play in betting, tokenized contracts, NFTs, and ticketing. 

The obvious place to start? Sports betting, of course. (Both traditional and eSports.) 

When I asked Sam Bankman-Fried (SBF) about FTX entering this arena, he responded economically: “Possibly.”

Even if not verified by FTX’s leadership, it’s a move that, on its face, makes sense. Many have argued the last year has shown a connection between retail investors and gamblers. When casinos and sports leagues shuttered during lockdown, brokerages like Robinhood and Coinbase prospered, with risk-loving participants trading the adrenaline rush of Sunday football for chaotic markets. 

With its high leverage offering, FTX has always courted this thrillseeker. But to date, it’s only been able to capture those with a high-risk tolerance who are also crypto-savvy. That’s a small fraction of a much larger population. 

Moving into sports betting would change that equation. FTX would find itself serving not only the wonkish trader but the adventurous everyman. Of course, those on the platform would also be able to sate their betting needs, increasing average revenue per user (ARPU). There’s a reason why one internal document lists DraftKings as a competitor.

This isn’t the only way FTX could play the sports market. After scrapping with the NBA for nearly a year, Washington Wizards point guard Spencer Dinwiddie won the right to sell shares in his tokenized contract in 2020. Though few investors were interested — likely because Dinwiddie sold just 90 tokens at $150,000 apiece — it laid the groundwork for future projects.

FTX is perhaps the only exchange that might be willing to experiment with tokenized contracts and could do them justice. What would it look like for thousands of fans to have invested in Luka Dončić’s supermax extension, perhaps fronting the money in exchange for upside? How much status — perhaps through NFTs — could be granted to these investors? And, once a sufficient market was established, could such positions be traded, like any other asset?

This alludes to a tertiary opportunity: sport NFTs. FTX’s US NFT page suggests the company is intrigued by this opportunity, with NFL cards making up most of the inventory. 

It’s hard to tell what should be made of these assets. In many respects, they appear like a visual “lorem ipsum” — filling the space until something better comes along. 

This might be an area best addressed through acquisition. Plenty of NFT exchanges already exist, and while FTX will point to the affluent customer base it has amassed, it’s not clear that traders necessarily want to purchase NFTs from the same place they exchange tokens. If one is motivated by financial gain, the other is motivated by status. Brand and aesthetic matter and FTX excels on neither front. 

There are two paths FTX might take in this terms of M&A: 

1. Buying an NFT creator
2. Buying an NFT marketplace
   

Dapper Labs is the most prominent company creating NFTs, with NBA Topshot its lead property. While a union is intriguing to imagine, given that Dapper is reportedly raising at a $7.5 billion valuation, the company is likely out of FTX’s reach. Sorare, which sells soccer NFT trading cards, is an alternative, though also sports a premium valuation of $3.8 billion. Moreover, given soccer’s relative lack of popularity in the States, the latter might not help FTX win the critical American market.

Of course, FTX may be best steered by focusing on NFT marketplaces, rather than particular creators. In many respects, this would make more sense given the company’s current feature set. Opensea, “the world's first & largest NFT marketplace,” was recently valued at $1.5 billion. That might strain FTX’s resources but is presumably in play. It would instantly provide considerable volume and moderate brand power. In its broadness — offering trading cards, music, and sports NFTs — Opensea seems spiritually aligned with FTX. Rarible, which has raised $14.2 million would presumably be significantly cheaper and achieve a similar end. 

Though ostensibly smaller, marketplaces like SuperRare and Foundation could represent other options. Both boast elevated, elegant aesthetics that evoke an art gallery rather than a bazaar. Whether that would mesh with FTX’s more chaotic sensibilities is worth pondering, though there could be value in the juxtaposition. 

Interestingly, SBF noted an interest in sports-related NFTs, though in a different form than anything we’ve mentioned so far. Specifically, the FTX CEO called out the potential for ticketing. Bankman-Fried described why NFTs might make sense, highlighting that tickets have a digital representation, a value, and are potentially interesting collectibles. He also noted the sketchy resale market ​​— hot tickets often sell for multiples of their intended price with intermediaries benefitting rather than artists, players, or teams. 

With FTX’s rights for Miami Heat’s arena lasting 19 years, there’s plenty of time for the company to leverage its perch. In time, fans may check into the FTX arena with an FTX NFT, watching a player whose contract they have invested in and whose likeness they have acquired in digital form. 

Crypto: Chasing consumers and institutions

Without venturing too far afield, there are ways FTX might grow within crypto. In the next 1-2 years, we can expect improvements serving institutions, a more mature staking product, and perhaps more consumer-friendly offerings. We may also see the company elaborate on its current prediction market product. 

Despite attracting plenty of whales, FTX has a relatively immature institutional business. Last week, we noted the company had 2,700 institutions onboard, a fraction of Coinbase’s total, for example. The US exchange reported serving more than 8,000 earlier this year. 

As interest in crypto increases, institutional investment is only likely to grow. Investors in the space have noted a sharp uptake in allocation to the sector already; FTX will want to ensure it’s positioned to capture the influx. 
Doing so will require a robust BD and sales team. Institutional seductions of this kind have long sales cycles, often requiring multiple touchpoints. As the newcomer to the space, and one arriving with a reputation for throwing caution to the wind, FTX will have plenty to prove. 

Platform advancements would help. As it stands, Anchorage is the clear best-in-class player, serving institutions and the ultra-wealthy. The company has raised $137 million to date and offers advanced, secure custody solutions, insurance, easily auditable data, and strong trading. Could a partnership be struck here? 

FTX cannot buy every interesting crypto company (even if Alameda invests in most of them), and for now, it will want to focus on acquisitions that grow its userbase. A deep integration with Anchorage could serve both parties — allowing FTX to convince institutions of its maturity while bringing Anchorage assets to custody. That could develop into something more in time. 

FTX should make staking part of its institutional upgrade. Staking allows customers to earn rewards — similar to interest — on delegated assets. While the company offers staking for its endemic token, FTT, there’s more to be done. Coinbase has upgraded its capabilities in this area in recent years, aided through the acquisition of Bison Trails, reportedly for north of $80 million. Coin98 is a seemingly comprehensive DeFi solution in Alameda’s portfolio that might help address the issue, though it does seem more focused on consumers. 

It would be savvy for FTX to offer similar products for retail investors, whether through staking or other means. Companies like BlockFi have attracted large customer bases by offering interest on crypto holdings. While this is achieved through lending rather than staking, the rewards for the end user are similar (though with differing risk profiles).

This seems to be on FTX’s radar. A purchase for BlockFi wouldn’t be sensible — the company was last valued at $3 billion, reporting it served 265,000 consumers and 200 institutions at the time of that round. That would make for some pretty rough CAC math from FTX’s perspective, with each customer valued at ~$11,000. BlockFi’s recent skirmish with the New Jersey Attorney General may suggest there’s wisdom in starting from scratch.

Nexo, a competitor that has raised about $50 million — a tenth of BlockFi — might be available at a cheaper price, despite boasting 2 million customers. That funding came from Arrington XRP Capital, a fund associated with the Ripple crypto project...which has had its own problems with the authorities. FTX should not let such issues deter them, but this may be a case in which building makes more sense than buying. 

Beyond these larger initiatives, FTX will want to grow some of its other product lines, enhancing its tooling for quantitative traders, bringing options trading to a less mature audience (a move that may bring the same risk and criticism Robinhood has faced), and growing the number of markets it offers. 

An expansion of its prediction market would be particularly intriguing. As it stands, it’s a unique offering in the space with the potential to attract viral attention. Though scarcely trafficked at the moment, the market saw a huge spike during the US presidential run-in. Could FTX engineer consistent upticks by offering more current prediction-based bets? What if every election, every Grammy’s or Oscar’s, could be wagered on? 

Just as sports betting would allow FTX to capture risk-lovers beyond crypto, a robust prediction market would facilitate speculative behavior independent of either interest. While this could be rather dystopian —​​ yet another encouragement of gambling — it fits with the idea of becoming an everything exchange. 

It also needn’t be so dark. An elegant instantiation of this idea can be found in Kalshi, with an acquisition mooted by one crypto expert. The Y Combinator graduate offers access to “events contracts,” enabling users to get “direct exposure” to future occurrences. How much will GDP increase? Where will the US’s trade deficit with China land? 

These are the kind of questions to which the CFTC-regulated exchange provides access. As the recipient of a $30 million Series A from Sequoia, Kalshi may reasonably want to build. But this is exactly the kind of creative move that suits FTX and the startup might be available at a comparatively reasonable price. Polymarket would be an alternative. 

FTX has already built a strong base in the crypto world, and yet, the expansion (and the speed of expansion) in the sector means there is so much more to be done.

Banking: Defense and offense 

In SBF’s mind, the distinction between traditional finance and crypto is an artificial boundary. When I asked him about FTX’s future, he quickly swiveled into talking about the desire to build out a fully-fledged financial giant, a kind of monetary super-app handling payments, custody, and of course, investing across asset classes. 

FTX has already shown its hand when it comes to which features it will prioritize: trading stocks and payments. 

As we detailed last week, FTX offers a market for tokenized stocks, meaning that users can buy synthetic shares in Tesla, 24/7. While a compelling add-on, serious stock market junkies are unlikely to flip their volume to FTX if that remains its only offering. To compete, we should expect FTX to pull a “reverse Robinhood.” Just as the commission-free exchange added crypto to bolster its core business, FTX can tack on traditional trading. 

Navigating regulatory approval is likely to take time, and patience is neither FTX’s forte, nor the move the market merits. That leaves an acquisition the likeliest outcome. In past interviews, SBF has stated that buying the CME Group — the world’s largest derivatives exchange ​​— was “not out of the question.” At a $75 billion market cap, it probably is, for now. 

Could Miami International Holdings (MIH) make sense? 

There would be undeniable emotional appeal in FTX snapping up a company in America’s most crypto-friendly city, not to mention the home of its buzziest sponsorship. More importantly, MIH is the owner of the MIAX (a Miami exchange), MGAX (the Minneapolis Grain Exchange), and BSX (a Bermuda exchange) and has been lauded for its impressive technology, designed for the derivatives space. Across its portfolio, MIH offers access to the sort of esoteric products FTX finds intriguing, including agricultural contracts, and volatility indexes. A commercial real estate derivatives market is coming soon. 

Whatever move FTX makes here, Bankman-Fried clearly wants to unite trading across asset classes on the platform. We should expect more soon. 

FTX Pay reveals the company’s other major interest. While the product is currently geared to handle online purchases, expect FTX to spread across the payments landscape, impacting both businesses and individuals. The company has already unveiled an FTX Card, in association with Visa. Though only partially baked, it illustrates how FTX thinks about the unbounded future of money and wealth — users can use USD, BTC, or other tokens to pay with no extra effort on the merchant’s part. 

Blockfolio could play a key role in expanding these features. As it stands, this is FTX’s most mobile and consumer-friendly property. Could it become the base for a real-world wallet or a peer-to-peer payments product? With 6-7 million users, Blockfolio’s userbase is essentially where Cash App’s was in 2017 — not a bad place to start. 

In time, we may see FTX attempt to build out a true neobanking suite. Had Dave not agreed to merge with Marc Cuban’s SPAC, it might have made an interesting target. Expected to list at $4 billion, the company boasts 10 million users and a solid product. Alameda is an investor. (To argue against myself: Dave also seems to have won over a less affluent audience concerned about overdrafts — FTX may see itself serving a wealthier base.)

While doubting FTX is usually a dangerous game, it’s fair to be skeptical of the company’s abilities in this area. 

Sure, it makes sense that SBF wants the business to become a full-stack financial behemoth...but is that what consumers want? 

Fintech is converging, with market leaders featurizing each other with regularity. Square is the best at this — Cash App gnaws at Venmo (payments), Robinhood (stocks), and Coinbase (crypto), while its recent acquisition of Afterpay reveals the trickiness “buy now, pay later” businesses may have standing solo. But everyone is trying to play this game, attempting to each its opponents. 

Where does that leave FTX? 

The company will hope it can move faster than its competition, devouring their territory before they reach its crypto homestead; a game of offense and defense. Can it? Clearly, FTX has some advantages — namely, the explosive growth of its native sector ​​and impressive team. But it is sparring with other well-run, impressive, innovative organizations for the most part. Many have greater resources. 

That’s without noting FTX’s unique drawbacks. While its focus on crypto has enabled a speedy rise, it may be a turnoff to consumers that see the space as speculative and unsafe. Even many tech-savvy customers may not want a bank with crypto DNA. 

FTX’s ambition to dominate the financial world is admirable; time will tell whether it is realistic. 

Sign up to learn about the next generation of disruptors. Our work exists to help you understand the businesses of the future and to capitalize on change. 

Social: CAC math

There is a vaguely unhinged idea I can’t shake: FTX should buy Reddit. 

Hear me out. 

As we unpacked in a previous piece, Reddit has been historically terrible at monetizing its userbase. That’s been reflected in its valuation with the platform’s daily active users (DAUs) pegged at 1/18 of Facebook’s at the time of writing that breakdown. While a brand-new $10 billion valuation mirrors an uptick in the company’s ad platform — bringing in $100 million a quarter — it is, for now, still underleveraged. 

FTX has demonstrated a talent for picking up large userbases and monetizing them effectively through trading. As we outlined last week, the company snagged Blockfolio’s base for the equivalent of $23 per user, then added crypto investing. With an ARPU of $337, that kind of acquisition can pay off quickly. 

Could something similar happen with Reddit? It would be a boggling move, but it might make sense. 

Reddit has 430 million users, of which 50 million are active daily. It is arguably the most crypto-savvy major social network, having minted native tokens for some of its popular subreddits. Users on these forums tip and purchase upgrades with “Moons” or “Bricks.”

Of course, Reddit is also the home of YOLO finance: Wall Street Bets (WSB). These are exactly the kind of users FTX could monetize effectively. Not only are they culturally pressured to trade frequently, they seem to gravitate towards higher-margin options trades. 

What if this community could trade from the same interface they use to chat, meme, and shit-stir? How powerful a cultural force would that be? And how much money could that make?

This is just the beginning of the possible integrations. What if r/politics integrated with predictions markets, or r/nfl plugged into sports betting? Viewed through the lens of a company like FTX, Reddit is a series of traders, waiting to be tapped. 

The price tag would make such a purchase difficult. But if FTX could structure the deal effectively, it could secure an oddly similar top-level CAC as it managed with Blockfolio. At a $10 billion valuation, Reddit’s 430 million users would cost just $23. 

There are lots of reasons to think this would be ill-advised, certainly. Redditors are famously cynical and wary of governance, meaning that new ownership might cause a firestorm, not least among more voluble communities like WSB. (Equally, I could see this community welcoming an overlord with YOLO credentials; SBF is considered a kind of trader demigod in many circles). 

Moreover, Reddit’s userbase is largely anonymous — a status that doesn’t sit naturally with a financial exchange. While it might be possible for users to maintain public anonymity, they would nevertheless have to grant much more information to the platform itself.

While buying Reddit might be the boldest move — creating a true social and monetary network — there are plenty of other ways FTX might strong-arm its mass-market aspirations. Partnering with Reddit or Twitter is one option, and perhaps a good test. Could we see crypto-tipping shadow Super Follows? That Jack Dorsey was one of the first major executives to ingest crypto’s red-pill suggests he might be receptive. 

Though less useful from the perspective of taking crypto mainstream, FTX could also pursue deals or partnerships with sector-specific social platforms. Despite its sketchy mechanics and unpalatable premise, Bitclout has attracted attention and capital for its “crypto Twitter.” It wouldn’t massively grow user numbers though (Bitclout had registered roughly 300,000 by late June), and a less than sterling reputation might stunt FTX’s regulatory efforts. 

A more intriguing maneuver might come from further afield. Though not a true social network, Axie Infinity is a social game that might allow for strong non-crypto customer acquisition. (If you’re interested in learning more, I recommend Packy McCormick’s fantastic analysis.) According to one source, roughly 50% of Axie’s 1 million DAUs had never interacted with crypto before signing up. These are exactly the kind of folks, FTX wants to nab. 

Could FTX or Alameda take a serious position in Axie and drive cross-platform pollination? It’s not immediately clear that FTX’s userbase would gravitate towards the game, though serious Axie players and breeders might benefit from a simple way to store their SLP and AXS tokens and trade them into other currencies.

It would also add an intriguing element to the “FTXverse,” giving participants a digital terrain in which to spend their winnings. In that respect, it might alter the dynamics such that FTX became less of an exchange and more of a true economy — one with absurd volume and activity. 

Should we expect FTX to move on any of these ideas? 

When I asked SBF about potential collaborations with social networks, he said, "We would love to. We're looking into things like that."

Consider that a warning to the market. 

For the man that “thinks in CAC," social networks may offer the best opportunity to acquire under-monetized customers in bulk. 

FTX began as a crypto derivatives exchange, but that doesn’t mean that will be its end state. Just as Bezos recognized books were the sharpest wedge to dominate the incipient e-commerce market, Bankman-Fried appears to have grasped that crypto represents the financial revolution’s most dynamic constituent. 

Already, FTX has demonstrated it is a business willing to innovate and experiment, with a desire to extend its boundaries far beyond the crypto world into sports, banking, and social media; to become a kind of everything exchange.

Amazon was once just a seller of books. In time, we may find it equally quaint to think of FTX as a crypto company.

Don't miss our next briefing. Join 55,000 readers and get powerful business analysis delivered straight to your inbox each Sunday. No spam, no noise. Unsubscribe anytime.