It has been eight years since Mt Gox, the then-biggest cryptocurrency exchange, imploded.
And investors and creditors, who were fleeced of something like 850,000 coins, are still yet to see anything back.
Mt Gox could have been yesterday. Or it could have been 2019, when Cryptopia, the NZ-based cryptocurrency exchange, collapsed.
Last week it was FTX, a Bahamas-based crypto currency exchange, placed into chapter 11 bankruptcy with an estimated million creditors out of pocket to the tune of billions, yes billions.
Apparently FTX’s founder, a 28-year-old with wild, too-cool-to-care-about-rules hair, Bahama-based Sam Bankman-Fried, simply shifted billions from his exchange to a hedge fund he also founded, called Alameda. What Alameda did with that money is going to be dug into over the coming weeks, but at first glimpse it seems Alameda held some shares in Sharesies-like US app Robinhood.
One of its biggest assets was reportedly a US$2.2 billion holding of a cryptocurrency called Serum. So far so stratospheric. Except Serum's estimated market capitalisation ranges from between US$78 million on Wednesday NZ time, to about US$88 million about the time that FTX went bust.
Related party transactions should always strike fear into the heart of serious investors (a specialty play in the finance company collapse era), and make an appearance here, too. Alameda also held what's been called an "unusually large amount" of FTX's own token, called FTT.
Once this news got out, rival exchange Binance decided it wanted out of its holdings of FTT and this triggered a run on FTX, FTX couldn’t cover the estimated US$5 billion in withdrawals, and as it announced it would shelter what business it had left in chapter 11 bankruptcy, FTX customers were live tweeting their fears that FTX was also being hacked and their accounts drained. And yep, that happened, with an estimated US$600 million disappearing from FTX's crypto wallets.
The playbook for the collapse of a crypto exchange is familiar now, like the airline safety manual in the back of your plane seat, you’ve seen it so many times the outline sticks in your memory but the details aren't important.
It looks something like this. Wobbly liquidity brought about by adverse news of some sort, a run on the exchange and investors try to pull out funds, a perfectly timed hack magics away all the coins, and then years of court orders, legal battles and chasing down allegedly untraceable coins with the only financial benefit swiftly coming to the trustees or receivers.
Or even simpler: exchange gets put under pressure, gets hacked, and step three is you never see your money again.
And why? Why is it like this? Aside from the obvious, that fundamentally cryptocurrencies have no value so it's at best a hit-and-hope not-at-all investment, the crypto industry is bristling with scammers and grifters and confidence tricksters, who brazenly boast to anyone who will listen how not only does the new wannabe banking emperor have no clothes, it also wants yours, including the shirt off your back.
One of the biggest problems with cryptocurrencies is that everything about them is a lie. For a start, it's not an investment, it's a glorified pyramid scheme or ponzi gussied up with a veneer of newfangled technology and impenetrable jargon strapped to a marketing rocket, that wants to shoot your money into the sun.
The big lie of crypto is that it's decentralised, miles away from those meanies in government, far away from that uncool red tape, legislation and regulation that makes banks and banking about to be superseded. Any day now.
While parts of this may be true, and regulators do not wield power over cryptocurrency and exchanges, who does wield all the power?
The scammers and grifters and confidence phonies who came up with whatever crypto of the day is in favour. This is their world, and you’re just visiting, Doge. Crypto is centralised with its founders, and this is the world of FTX’s founder, Sam Bankman-Fried. This is his business pitch (TM).
Have I got an empty box for you!
Other people, hedgies and big investor types, have seen this empty box. They say it’s pretty cool. It’s going to change the world. Or maybe it’s just a box. But the potential is huge. You can have a slice of the box, just put some money into it, then it comes back in token form. We’re calling the tokens emptee.
I’m gonna tell lots of people about emptee so if you want in, now is the time. Of course, after the success of our last project, Fleecor, you’re gonna want a piece of it. Who doesn’t? It’s already valued at $200 million. Yeah, I know. Empty box, emptee. Write it down. It’s already massive, and growing rapidly. Every time someone takes a slice and gets more emptee, the value of emptee increases. Obviously, it’s worth it. It’s worth millions. I heard Elon is going to tweet about it any day now…
Is it any wonder so many people don’t understand what the likes of Bankman-Fried are offering? Its so stupid and ridiculous you have to suspend disbelief. Of course it makes no sense to give money to someone who has decided an empty box is worth $20 million. Sorry, did I say $20 million? I meant $200 million. Whoops, almost like I just made that up!
Possibly the most gobsmacking thing about investing in an empty box is that not only would you have invested in an empty box to secure your empteeness, but you could then also have what you invested into it taken by the very same people that enticed you into getting involved, and then you fruitlessly wait for years to see … well nothing. You put money in a box, what did you expect? It to stay there? It wasn't a locked box, or a safe or, say, a bank vault.
Now, investors are constantly being softened up to join the crypto delusion. They think, carpe diem. I can't possibly be the one that gets burned. Someone else will. But not me. I got into emptee early!
FTX has been at the forefront of the massive rise in awareness of crypto. It became a naming sponsor of the high profile Miami Heat basketball stadium in the US, and it has been a familiar name on the nose of the Mercedes team competing in Formula One this season.
Some KiwiSaver schemes have decided to follow the cool into crypto. Hedge funds will always be where there is money to be made. But they're gilding what isn't even a lily. Its just an empty box.
The NZ regulator, the Financial Markets Authority, will tell you, if you will listen, that crypto ain't it.
FTX was a triumph of marketing over substance, and the most crypto thing FTX could do was fail, in the way it did.
140 Comments
Bad take IMO, even though everyone knows the crypto space is crawling with scammers and hucksters. Comparing Mt Gox with FTX is a start. They're entirely different. What's more, the Mt Gox downfall resulted in Japan becoming arguably the best regulated crypto market on the planet. The U.S., EU, Korea, and even Aotearoa Rugbyland are miles behind.
A much better take appeared in the WSJ y'day by an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation and the committee’s research director. The blame is laid quite squarely on the ruling elite.
Quote:
It didn’t have to be this way. These crypto assets should have been held, or “custodied,” by regulated banks and broker-dealers, not by unregulated crypto exchanges, but Mr. Gensler and the SEC stood in the way. An independent custodian holds customer assets and controls their movement to ensure their safekeeping and prevent misuse of funds, including those that are due to conflicts of interest, the problem at FTX.
Banks typically custody assets for institutional clients and brokers for retail. The segregation of assets, accounting for them separately from exchange assets, as suggested by Treasury Secretary Janet Yellen in response to the FTX failure, isn’t enough. These assets need to be custodied by banks and brokers, whose regulatory framework can ensure that customers can get back all their funds and not become mere creditors in the exchange’s bankruptcy.
https://www.wsj.com/articles/an-sec-rule-may-cost-ftx-customers-billion…
everyone knows the crypto space is crawling with scammers and hucksters
It comprises almost solely of them, and the remnants are the aspirationally wealthy.
The supposed cost benefit of crypto doesn't exist once you end up regulating and governing it like any other currency.
It's a slow car crash.
It comprises almost solely of them, and the remnants are the aspirationally wealthy.
You can include Blackrock and Fidelity in your list of scammers then.
Fidelity Investments has been doubling down on cryptocurrency in recent months, even as digital currencies and some of the key companies in that space have faced turbulence.
On top of Fidelity Investments’ plan to make bitcoin available as an investment option in employers’ 401(k) plans this year, the company recently paved the way for a retail cryptocurrency trading platform
https://www.bizjournals.com/boston/news/2022/11/14/fidelity-crypto-expl…
You could make your own currency, hoard most of it, and release smaller amounts to the market, thus making yourself some sort of Tsar. I.e. what the reality is for any of these currencies, their primary reason for existing is to enrich their creators.
Self custody, put it in an exchange, from the very get go any new entrant is inherently disadvantaged.
SBF’s disgrace could make things awkward for Gary Gensler and the Democrats
Gary Gensler blew it again. After his agency failed to warn investors about Terra and Celsius—whose collapses this spring sparked a trillion-dollar investor wipeout—the Securities and Exchange Commission chair allowed an even bigger debacle to unfold right under his nose. I’m talking, of course, about the revelation this week that the $30 billion FTX empire was a house of cards and that its golden boy founder, Sam Bankman-Fried, is the crypto equivalent of Theranos’s Elizabeth Holmes.
Crypto is a zero-sum game. So too, or at least, trending towards it, was issuing ever-more fiat 'money' within a Bounded System.
Where this outfit went, there went LTCM a couple of decades ago, and there will go much of parasitic mainstream finance (which now out-sizes real activity by some orders of magnitude), sometime soon.
But the FMA will remain stubbornly silent on that, eh?
I'm no expert, but isn't Crypto basically a future asset value forecast via current monetary policy, i.e. when there is QE, crypto goes up, and when there is QT crypto goes down? A lot like traditional asset values but far quicker as every coin is hooked to an instant exchange/market/CPU/GPU/hive mind thingy, so the values change in a more volatile (due to leverage against currencies) and instant (due to programming resource and simplicity) manner?
Shouldn't crypto be able to hold its market value (manage perceived inflation), if that's what you want, by simply issuing more varieties or brands of coins on ever increasing server and network space? Not actually offering any value other than giving markets a quicker, wider and more accessible indicator of future (non crypto asset) performance?
I'm no expert, but isn't Crypto basically a future asset value forecast via current monetary policy, i.e. when there is QE, crypto goes up, and when there is QT crypto goes down?
The idea of "crypto" as market of similar assets is broken. Firstly, there is ol' ratty and there is the rest. Secondly, there does appear to be a relationship between expansion of the money supply and QE. However, the idea that we're in a period of QT is debatable. The relationship has yet to be validated in any meaningful way.
Sam explained it simply and beautifully. He has a great turn of phrase. You put a dollar in Sam's unlocked box. How much will you pay for that box? It is in Sam's possession the whole time. It is either worth a dollar, or Sam has taken it and bought a flat in the Bahama's, and invested in a Political Party who will let him do what he wants, and look after him, if needs be. You decide. Two dollars now, no, three dollars. And so on. Until it's not. He will have some amount stacked away untouchably. Keep an eye on his career over the next five-ten years.
No. You don't get it. Fiat currency issued by a government is guaranteed by that government and the economy it manages. In other words it is backed by all the economic assets of that economy. Crypto is backed by what? Nothing!
Don't buy into the hype. Think about it first.
It is that simple. People overthinking it into being something it can't be is the problem.
No one's explained why this isn't a service and why it has to be a specific currency.
Crypto is inviting you to entrust your money in an unregulated currency that's usually benefitting its creator and little else.
Depends. Cryto is best thought of as a car. There's some bits you absolutely need. There's other bits providing some purely functional stuff like engine oil. And then there's the heated steering wheel, the seat massagers and all the other crap everyone else managed fine without for years.
Bitcoin is probably the engine, given the pricing expectation for the whole industry that it reflects. Everything is relative to Bitcoin after all. But there's a bunch of web3 cryptos for things like near-instant/instant settlement that don't have the same crappy fees and Bitcoin and can almost replace an EFTPOS terminal system. They're the grease, the oil, the coolant and all the other unsexy bits that you don't see, but are there to do a job.
In some cases the tech is the prize and there are real solutions it is looking to solve. Earlier this year I had to send money to Japan for a car. It took days. I could have sent it in under a second using a block-chain wallet transfer on a network like Nano. Instant settlement for large cross-border asset purchases would effectively snuff out days of lost productivity a year around the world. These are the problems it can solve, if the industry stops crapping its pants over cone-smoking monkey NFTs.
They don't have the same fees as EFTPOS because they're unregulated and lack widespread infrastructure. Once you do that, you have no cost advantage.
So the remaining benefit is speed, which is many realms has and is being mitigated - and again for a crypto to fill this role, you'd need a great degree of international legitimacy/legal framework for it to be widely adopted.
So it's a rocket car that can't use already existing, commonly adopted roads.
They don't have the same fees as EFTPOS because they're unregulated and lack widespread infrastructure. Once you do that, you have no cost advantage.
The 'infrastructure' is the mining network keeping the blockchain ticking over. The rest is driven by QR codes generated to facilitate mobile payments from a wallet app. That's pretty much it. No terminals, no waiting until midnight for a lumpsum payment of all your takings to hit your account - it's all there already. It's also a long way from being something useful in a retail environment, but it will probably get there.
And the fact it doesn't have an international framework to cope with AML doesn't mean it never will come up with one. But it's an example of a real problem with tangible gains that can be realised through a blockchain solution. Not everything evolving in the crypto sphere is meme tokens and ponzis.
I'm talking more about regulatory infrastructure than a technological framework. That's why traditional banking is slower and relatively more expensive.
Again, there's a case for it as a disposable service, why you'd actually need to possess a crypto currency long term escapes me.
The RBNZ for all intents, works for the NZ Government. Thus any money issued by it is in effect issued by the government.
I agree with you. But the story you are told is that the govt and central banks are "independent".
Don't you ever think that the people are being played?
Fiat currency has value because the government demands, by fiat, that you can only pay tax with its currency of choice. If you don't, you will be imprisoned. Otherwise what are we actually doing? Swapping bits of polymer around with a nice picture of a bird and a dead person on it. Bitcoin has more intrinsic value than that.
Rubbish. You're selling crypto on a line of BS. Any Government manages an economy. When that government is also the sovereign owner of a currency, then the assets and benefits of that economy provide the backing to establish the value of the currency. Other factors play a part too, but that's it in a nutshell. So what assets back Bitcoin? Bitcoin's value is only established by peoples faith in it and belief that it will continue to appreciate so they gain on their 'investment'. But what have they 'invested' in? Just a digital token that has no intrinsic value of its own. A dollar though has an intrinsic value based on the economy in which it is issued. The US$ is a little special as it covers two economies; the US domestic one, but also as the reserve currency it covers much of the world's economy, especially international trading. The fly in that ointment is that there is little to no international oversight on how the US$ is managed.
No? where has all the crypto gone from the collapse of these exchanges? And if it is not stolen it can be lost. There are ample stories of individuals who have lost the access key to their personal wallets when they held their own, or in some cases lost the USB where it was held. So that is a bogus claim too.
In 2011, MF Global faced major pressures to its liquidity over several months. Some analysts and financial commentators indicate that MF Global probably experienced a number of trading days in 2011 during which the firm's bets on sovereign debt would have required the use of customer funds to meet capital requirements, thereby maintaining operating funds and possibly overall solvency. Link
“For a start, it's not an investment, it's a glorified pyramid scheme or ponzi gussied up with a veneer of newfangled technology and impenetrable jargon strapped to a marketing rocket, that wants to shoot your money into the sun.”
Don't hold any punches Rebecca! Great article.
As someone who works in tech, it doesn’t necessarily matter how cool your tech is, it all comes down to whether people really want to use it. Personally I’m quite happy with my NZD bank account, credit cards, all maintained by a central server and guaranteed by my bank and the NZ government. I don’t need or want to change, and even if I did, I’m not sure crypto is that enticing. It’s a solution looking for a problem.
I’ve known a number of people scammed where the bank has repaid them despite it really being their fault. Sure you hear the odd horror story, but in general the banks are pretty good. Highly unlikely that would happen with crypto.
maybe “guaranteed” is too strong a word for fiat in a bank, but “pretty bloody safe” wouldn’t be.
I know what you're saying, but think of it this way:
- Someone gains access to your crypto and steals it, or you lose access. Who do you phone?
- If someone fraudulently gains access to my bank accounts and cleans me out through no fault of my own, I just call up the bank.
Excellent article. There’s going to a movie about ftx and sbf, for sure.
4 months ago — https://youtu.be/NYaoUEO6gtc
It's all speculation, but you want your investment to have some sort of rationale, increasing your odds of success.
Apple announces a new phone or whatever, that's something to back, but you can't guarantee the outcome.
What's the upside with crypto? More new entrants will want to buy some, and you already own a decent quantity?
You're lumping all crypto in with the bitcoin model. Ethereum for example provides a reasonably stable return (paid every six minutes in ETH) for providing security to the blockchain (Proof Of Stake consensus). Coins staked are temporarily taken out of circulation, reducing the liquid supply and in theory pushing up prices (assuming demand stays the same or increases).
EIP-1559 implemented August 2021 makes it so that that a portion of all fees is burned (removed from circulation permanently) while also resulting in a deflationary environment when demand for the network is up. Further reducing circulation and pushing up prices.
ETH the token is used as gas or fuel to execute smart contracts in the Ethereum ecosystem to power decentralised applications like lending and borrowing without the need for a bank or other trusted third party. Each smart contract execution burns more ETH.
There are many valid reasons to speculate on higher ETH prices in the future. Personally, I don't care for BTC.
Nature provides a level of scarcity that helps ascribe value to a precious metal.
The scarcity in crypto is 100% by design. Made up. Illusory. Of no consequence.
For things like Diamonds it works, because the miners/traders hoard the majority of product and trickle feed supply, whilst also juicing demand by promoting diamonds as a fashion item.
What's the demand for crypto for? Much less so it's function and more so the proposition of future riches. That's only compelling for so many people.
So imagine if there were only 21 million dollars ever, but before they were distributed, the majority of them were squirelled away by its creator and a handful of early adopters.
Doesn't seem a great basis for a currency, again, it's a worse version of what we already have.
Doesn't seem a great basis for a currency, again, it's a worse version of what we already have.
Currencies that cannot be diluted sound great, depending on what properties you think a currency should have. At the end of the Roman Empire, Nero started the debasement of Roman coinage and got fatter in the process. High time preference in money and food go hand in hand, today and in the Roman Empire.
What do all these catastrophic failures have in common? They are all centralised exchanges. The bluechip protocols which serve as the backbone of Decentralisd Finanance or DeFi (Maker, Aave, Curve, Uniswap and some others) have been bulletproof and unflinching. These events are of course negative for public perception of crypto overall, but I believe in hindsight they will be seen as great marketing for Defi.
Of course, Defi isn't perfect and there are plenty of dodgy antics and rugpulls in recent memory. But we're in the early days, the wild west. It's all trial and error, but the early will be handsomely rewarded.
For one, it is the most decentralised cryptocurrency ever created. This is a very significant difference. It is also capped in supply and uses proof of work to secure the network (these two aren’t unique features, but set it apart from most).
This FTX is a good lesson that Bitcoin is best and not to store your crypto on an exchange.
You just reminded me of a certain Big Bang Theory episode where they lost their crypto USB, which Stuart then finds and reformats for $10.
I wonder what the likelihood of tech breaking vs houses burning down/mattress being stolen is.
Also, it's not a form of storing "value", just digital bits. Value is what is ascribed to those bits, and that varies whether the coin is in hot or cold storage.
Patrick Boyle does a detailed breakdown of the downfall of FTX/Alameda here. It's quite funny and sad:
Cold Fusion just released an excellent breakdown drawing links some people wont know about.
There are boosters who don't understand it, but boost it anyway.
Then there are boomers who don't understand it, but undermine it anyway.
In my experience, those who do understand it, do it properly and conservatively. They don't over-invest, they only really take ETH and BTC seriously, and most of all they don't store anything in an exchange.
Great article. Without looking, I am sure that a few true believers will rush to defend the crypto world. Why? It's confirmation bias. These guys are so heavily invested psychologically in cryptos that they just ignore what is happening right before their eyes. It could also be called the Trump effect.
Great article. Without looking, I am sure that a few true believers will rush to defend the crypto world. Why? It's confirmation bias. These guys are so heavily invested psychologically in cryptos that they just ignore what is happening right before their eyes. It could also be called the Trump effect.
Not sure I agree with this.
1. Believing in the properties of BTC as money is not "defending the crypto world". People who conflate BTC and crypto do not understand the basics of the space.
2. What is happening right now (centralized exchanges are crumbling) is not being ignored. For many BTC maxis, it has been expected. But it has nothing to do with the value of BTC.
3. People say all the time "BTC is going to zero". I ask why and usually the answer is about "no value"; "it's a scam", etc.
But the logic is emotion driven. I used to think yes it's possible that BTC can go to zero, but what does that actually mean? All the on-chain data shows that the number of wallets are increasing and that 67% of BTC hasn't moved in the past 12 months, that would mean that the demand exists for BTC and some people perceive it as having value.
99% of people commenting on crypto don't know much about it. There are now thousands and thousands of coins, so obviously most of them are borderline worthless. But that doesn't mean all of them are. On one side you have meme coins like Doge (or its offshoots like Shiba, just to mention two of the best-known), which are admittedly nothing more than a joke; that's how they started, and there's no good reason why they couldn't collapse to pretty much zero. But there are plenty of other coins out there which are, at least potentially, transformative in various ways. Some of these are projects with a legitimate use case and business model, whether or not they are ultimately successful. Gaming-based projects and web 3 projects are two that come to mind. There's a reason why venture capitalists have poured billions of dollars into crypto. It's not just pure speculation.
As I started Rebecca's article I thought JC would be would be all over the comments.
Sure enough JC (he/her/they) seems hysterical about the whole idea that crypto is a sham. More and more detail and mumbo jumbo etc, detailed tree descriptions but refuses to see the forrest.
Remarkably, among the assets listed in the document was $4.1bn of related party loans extended by Alameda, $3.3bn of which was to Bankman-Fried both personally and to an entity he controlled. Bankman-Fried previously said that FTX had “accidentally” given $8bn of FTX customer funds to Alameda.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.