The FTX collapse hits Gadze Capital, the crypto fund led by Top Hat founder Mike Silagadze

Mike Silagadze in Toronto on June 30, 2020.Peter Power/The Globe and Mail

Mike Silagadze survived what he calls a sector-wide “nuclear bomb” – the explosion of cryptocurrency exchange FTX Trading Ltd. – wounded and upset, but not critically injured.

The Toronto entrepreneur, best known for building online textbook company Top Hat, founded Grand Cayman-based Gadze Finance last year to invest in the crypto space. When FTX’s high-profile meltdown began this month, Gadze had $5.4 million of its roughly $40 million in assets in custody on the exchange, where it was short selling cryptocurrencies as part of a hedging strategy.

Within days, Gadze attempted to withdraw his fortune. But it is too late, said Mr. Silagadze. Now that money is tied up in the form of fiat currency in FTX’s bankruptcy proceedings.

Though Mr. Silagadze hopes Gadze gets back 20 to 50 cents on the dollar, that’s unlikely to happen for years, he said. He estimates that his fund will manage a return of 10 to 15 percent.

“I went through all the stages of grief,” Mr. Silagadze said in an interview. “Most of all, I feel terrible for our investors. I feel like I let people down because I was supposed to be protecting their money – and my own.”

Mr. Silagadze believes he personally lost more than $1 million.

The loss may sound like a relatively modest stroke of historical obliteration; it’s certainly not a fund killer. But Mr. Silagadze had touted Gadze as a relatively safe bet in crypto’s wild west, a low-risk return fund that could generate 10 to 12 percent a year.

The fund did not invest directly in cryptocurrencies to protect against price fluctuations. It provided liquidity to crypto exchanges and generated a return in return, a process known in the industry as “yield farming” which Mr. Silagadze even called a “boring way of investing in crypto” at the time of its launch would have.

Gadze has also been backed by prominent Canadian crypto investors: Version One Ventures by Boris Wertz, Purpose Investments by Som Seif, Toronto entrepreneur brothers Michael and Richard Hyatt, and Ripple Ventures.

Things were going according to plan, Mr Silagadze said. Then Bahamas-based FTX imploded.

The collapse of what was once the world’s second-largest crypto exchange has cost more than a million registered customers and other investors billions of dollars in losses.

“We worked so hard to mitigate the risk, we were meticulous. All of our trading strategies did exactly what they were supposed to do and worked well,” Mr. Silagadze said, adding that the fund returned a handful of basis points daily.

“As investors, we were all happy,” said Michael Hyatt in an interview. “What we didn’t see was the counterparty risk of a giant like FTX being a bad player.”

FTX filed for bankruptcy in Delaware on November 11th. Last week, FTX announced that it owed nearly $3.1 billion to its top 50 creditors. It is believed to have channeled customer assets into risky bets via an affiliated trading company.

Mr Silagadze said he initially had “a feeling of utter disbelief” as the FTX saga unfolded. He had chosen to trade primarily on FTX because he thought it was a safer and more reputable platform than other exchanges. It was managed by a high-profile crypto leader, Sam Bankman-Fried, who galloped with politicians in Washington, DC and had notable investors like Sequoia Capital and Tiger Global Management.

Now, however, Mr. Silagadze is particularly upset with FTX investors, including the Ontario Teachers’ Pension Plan, which has invested $95 million in FTX for giving it credibility.

“What kind of care do teachers take when investing in it? Haven’t they looked at their books? Didn’t they see how exposed they were?” said Mr. Silagadze. The teacher had “clearly fallen asleep at the wheel”.

In an earlier statement, Teachers spokesman Dan Madge said the fund conducts “sound due diligence on all private investments.” Teachers will write off their investment in FTX to zero by the end of the year.

But Mr. Silagadze doesn’t deflect the blame and wants to make it clear: he knows he screwed up.

“Obviously we were wrong about the risks we took,” he said. “We could have been more careful, we could have made sure we were less exposed to FTX.”

He said nearly all of his 65 investors have been understanding and supportive. “He’s in constant communication and working extremely hard to fix a bug for investors,” said Mr. Hyatt.

Mr. Wertz added: “Mike handled that super well, he didn’t do anything reckless. He considered this a safe exchange, as did many other people. His takeaway, which is the takeaway for the entire crypto market, is: don’t trust centralized entities unless they are regulated.”

Mr. Seif of Purpose Investments, which launched Canada’s first Bitcoin ETF in early 2021, said FTX is not representative of the crypto industry. “Unfortunately, it falsely reflects on crypto as a whole and perpetuates that narrative that crypto sucks and that the whole thing is a sham when it really isn’t.”

Mr. Silagadze said while briefly reflecting on his future with crypto, he was “still bullish” on space. “I will definitely continue, rebuild and change strategies,” he said.

He is changing the strategy of his market-neutral USD fund to take on more risk in hopes of higher returns. “The things we are doing now are more interesting and have higher potential than what we were doing before,” he said.

“If I can say anything about Mike, it’s that he has an incredible drive to succeed and find things out. And he won’t give up,” said Mr. Wertz. “It certainly throws you back and it’s a tough experience but he’ll come back stronger.”

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