Inside FTX's unique strategy to cash in on the IPO boom

As Wall Street investors sound the alarm about frothiness in the initial public offering market, one of crypto's most creative players is crafting a unique strategy to capitalize on the boom. 

FTX, which made headlines last week for launching a pre-IPO derivatives contract for Airbnb, could offer similar markets ahead of the potential initial public offerings of unicorns like crypto exchange Coinbase and brokerage firm Robinhood, according to chief executive officer Sam Bankman-Fried.

The strategy is part of FTX's broader desire to offer a multifaceted platform covering tokenized stocks, derivatives, and crypto. "It has just been great for long-term product growth in that there is a pretty decent chance that long term-trading in things that aren't entirely crypto is going to end up being a big part of the business," the 29-year-old executive said.

The Airbnb futures contract provided non-US retail investors one of the sole opportunities to bet on the California firm's share price ahead of its listing on Nasdaq last week. After it listed, the contract rolled into a tokenized equity.

The market for these assets is small relative to FTX's crypto products. Only $1 million traded on the day Airbnb listed. But the firm only launched in 2019 and is already a unicorn. And interest in such a product could be stronger in firms in the crypto market, such as Coinbase or Ripple. 

Source: FTX, The Block Research

FTX's ambitions in stock trading are underscored by what appears to be a mounting appetite among retail traders for shares in trendy IPOs. Airbnb provides a perfect example. An overzealous demand for shares sent the stock up more than 100% during the first day of trading, adding $1 billion to its market capitalization in just one day.

Meanwhile, Google searches for "IPOs" soared to the highest level in at least 16 years, as reported by Bloomberg News on Saturday.

Source: Google, The Block Research

This backdrop is worrying some Wall Streeters. "It is a sign of frothiness, a sign of incredible demand, a sign of a retail investor that ... just wants to get in," Jim Tierney, an executive at AllianceBernstein, told the Financial Times. 

But Bankman-Fried sees an opportunity to capitalize, and said FTX is set up to do so. "Even if the thing itself isn't crypto, we have the infrastructure for it: from matching engine, on-ramps, off-ramps, customers, risk-engine, futures, liquidity." 

Hypothetical Robinhood or Coinbase futures would either cash settle to the price at which the stock starts trading, or it could roll into tokenized equity the way the Airbnb contract did.

In a sense, these would resemble products that have traded in over-the-counter markets, according to Lothian News' Thom Thompson, an expert on derivatives. The problem with FTX's market is that it is not regulated in the US and so wouldn't have the same oversight as the exchanges where traditional Airbnb stock trades. 

"If insiders are involved they can distort the market to their own benefit — push the go-to-market price up or down and then trade pre-sale the other way," Thompson said. "But with a company this big, that is unlikely to be much of a problem," he added. Airbnb raised more than $3 billion in its IPO, a figure that dwarfs FTX's Airbnb market. 

In any case, the process for building these new markets isn't necessarily straightforward, especially for contracts tied to firms that don't have a set listing date. 

"It would be doable," Bankman-Fried said about launching a market for Robinhood. But it would be more complicated than the Airbnb's futures market, which went live the day before the actual IPO. 

"When you think about listing Robinhood equity, well what happens if it gets acquired in 3 months instead of listing?" Bankman-Fried said. "What if it gets acquired and the acquiring company lists? With Airbnb, it is a lot less risky because it was one day." 

There's also the question of how FTX should hedge — that is to say, covers itself in the event that things in the market go wrong. For instance, the derivative's price could dislocate from what a stock is trading at on US-based exchanges.

If it was a simple equity derivative, FTX could hedge by buying up stock in the underlying. But with a pre-listed stock contract, there's no established strategy. "Anything you're doing is going to be bespoke," said Bankman-Fried.