What does the FTX collapse mean for TSM and the esports industry? cover image

What does the FTX collapse mean for TSM and the esports industry?

The TSM Title sponsor’s collapse might mean tightening the purse strings for esports.

The world of cryptocurrency has been in troubled waters for the past few days with Crypto exchange FTX collapsing like a house of cards. This event has an impact globally across financial markets as well as esports. FTX signed the largest esports naming rights deal with TSM worth $210 million in June last year - the largest deal of its kind in esports. 

Hero to Zero in 24 hours

In January this year, FTX’s Series C round raised $400 million at a valuation of a whopping $32 billion, up from a valuation of nearly $25 billion a year ago. The valuation increase for the crypto exchange was surprising given the global financial scenario.

Even as other exchanges were going through Crypto Winter, FTX’s bullish outlook and self-portrayal as the savior of the crypto industry was not unnoticed. However, just a few months post the $32 billion valuation, the FTX stock has come crashing down. 

Today, FTX’s valuation is $1 even as the company faces scrutiny from the public and government authorities.

On November 7, 2022, FTX founder, Sam Bankman-Fried said the following in a twitter thread (now deleted):

FTX is fine. Assets are fine.

He went on to claim FTX has enough to cover all client holdings. 

He had to make this statement following reports of delays in withdrawals which led to even more withdrawal requests.

This tweet only served to fuel the insolvency rumors already floating around. Hours later, Binance CEO, CZ announced they are looking to sell all their FTT token holdings. At the time of the tweet, Binance owned nearly 23 million FTT tokens worth about $529 million. 

How did the rumors begin?

A Coindesk article last week revealed that Alameda Research’s balance sheet was stacked with FTT tokens. As of June 30, Alameda Research’s total assets were valued at $14.6 billion out of which more than $5 billion were directly linked to its sister company’s FTT token - an altcoin that is basically manufactured out of thin air. While there is nothing wrong with the token backing, the percentage FTT tokens in the total assets was concerning. The lack of a clear stable foundation for Alameda Research spooked investors and many began pulling out.

There was a massive surge (multiple times the regular withdrawals) in FTX. And then the problems started.

With delays in processing withdrawal requests and subsequent tweets from the FTX co-founder further complicating matters, things were looking good.FTX approached Binance to come in and clear liquidity crunches. 

Binance signed a non-binding LOI, intending to fully acquire FTX and help cover the liquidity crunch but only after completing its due diligence. 

Coming in as the potential savior not only for FTX, but also for an entire industry whose confidence was at an all-time low following recent news, Binance just could not go through after seeing more of the FTX data. 

White Knight backs out

Twenty-four later, Binance publicly backed out of the deal, creating further problems for the world’s (former) third-largest crypto exchange.

When the CEO of Binance, CZ, tweets out this sad message, you know FTX’s downfall is not good for the industry.

The Cryptocurrency industry has been going through a rough time recently. With stark drops in valuations, the industry was no longer the ‘opportunity to earn money' for retail investors. But a sizable portion of the global economy was still invested in the crypto market. 

Long-term investors saw the dip as the perfect opportunity to buy more and possibly reap rewards later. FTX was seen as an all-weather exchange and had the trust of a large section of the community. 

But the smoke and mirrors structure erected by SBF has since been shattered and today, FTX is valued at $1. 

Calming spooked Investors while playing League of Legends 

On November 10, 2022, SBF apologized to the community despite blatant lies before the US lawmakers a year earlier. The past year has not been good for the crypto industry but even as other exchanges were losing money and valuations, FTX’s continued to surge. Much to the surprise of industry experts and analysts, FTX continued to raise money at astonishing levels.

“I thought they were just minting money and had absolutely no need for investors.

FTX raising money was a cause of concern to the org’s largest investor, Sequoia Capital. However, following a meeting with SBF, one during which he was playing League of Legends while calming Sequoia Capital attendees, things went back to normal.

“I sit ten feet from him, and I walked over, thinking, Oh, shit, that was really good. And it turns out that [SBF] was playing League of Legends through the entire meeting.”

The series B round raised a billion dollars in July 2021. After the recent revelations, Sequoia Capital has marked its FTX investment down to zero dollars. At the time of writing, Sequoia Capital had nearly $210 million invested in the crypto exchange.

FTX and Gaming

Earlier this year, FTX launched its own gaming division. The initiative was a part of its efforts to encourage more game publishers to embrace cryptocurrencies, blockchain networks and NFTs.

It is important to note that FTX’s Gaming division launched via FTX US, a different part of the FTX ecosystem. Ever since the recent findings, SBF has repeatedly reminded users FTX US is a separate exchange available to US residents. FTX is incorporated in Antigua and Barbuda and headquartered in The Bahamas (previously Hong Kong).

In March 2022, FTX’s Gaming division acquired Good Luck Games shortly before the studio’s launch of Storybook Brawl.

FTX signed a partnership with LCS
FTX signed a partnership with LCS

Last year, FTX also announced it would be a part of a $100 million investment to spur the development and synergy of the Solana blockchain into video games.

But FTX’s biggest impact on gaming and esports was its title sponsorship with TSM. The North American org changed its name to TSM FTX for 10 years for $210 million. This is in contrast to FTX’s arena naming rights with Miami Head for $135 million across 19 years.

FTX brand displayed near the scoreboard
FTX brand displayed near the scoreboard

A few weeks later, FTX also signed a sponsorship agreement with 'League of Legends' Riot Games for 7 years. The deal would see the FTX logo displayed across LCS matches near the gold advantage resource counter as well as on the bottom left-hand side of the screen. Player net worth, total team gold and gold graphs would also feature the FTX branding.

FTX also sponsors the LCS’ "Most Improved Player Award" with prominent display across LoL esports matches.

Impact on esports - Beyond TSM and Riot Games

From a broader investment perspective, FTX’s collapse and the subsequent erosion of confidence in the crypto market does not bode well for the esports industry.

With rising inflation, poor returns on VC investments in the past few years and now the shock to the crypto industry, Venture Capitals are increasingly scrutinizing further investments. As such many esports orgs looking to raise money in the next few months will find it tough to get easy funding. 

This could result in a correction in player and staff salaries over the next year. The esports industry has continued to rise nearly unabated with COVID providing a significant boost to the industry. However, even as the industry continues to grow rapidly, the wealth distribution has not been even. Unlike physical sports, esports has game publishers - owners of the titles, who can dictate the terms of their games’ esports scenes.

As we head into 2023, esports organizations have to provide more value in terms of content creation and more influencer marketing than just esports rosters winning tournaments. 

Stay tuned to esports for the latest esports industry news and updates.