city Sequoia Bahamas UPS Provident COST cryptocurrency Binance city Sequoia Bahamas

Will FTX-Like Unicorns Be the Next 'Big Short'?

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As his luck would have it, Michael Lewis has been trailing FTX founder Sam Bankman-Fried for the past few months. The author of The Big Short won't be short of material, but one thing he probably won't find is a big group of skeptics who successfully wagered on the demise of the $32 billion crypto exchange.For one, credulous crypto traders aren't natural fraud detectives: Even SBF rival Changpeng “CZ” Zhao, head of Binance Holdings Ltd., says he didn't short FTX's native token, FTT.

He was instead left holding a big bag of near-worthless magic beans — along with hundreds of thousands of creditors.Moreover, because Bahamas-based FTX is private, it wasn't possible to short the company's shares, which involves borrowing, selling and buying the stock back again, hopefully at a lower price.But financial engineers are trying to solve that problem.

Derivatives allowing institutions to bet against unlisted startups are beginning to gain traction, and that's good news because short selling can help in holding unicorns to account.With Theranos and now FTX, the herd-investing mentality and lack of gatekeepers and good governance in the startup world have become all too apparent.

Due diligence seems to be an afterthought for some venture firms and late-stage investors, which is a problem when startups face the temptation of “faking it till they make it” and are staying private for longer. (One of FTX's backers, Sequoia Capital, said it does extensive diligence on every investment and that it's in the business of taking risk.) We shouldn't count on VCs.

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