The thing that this piece really got me thinking about is how many other crypto companies are the same ponzi scheme because they are counting made-up things as assets on their balance sheet.
In other words, suppose I create token SCAMMER, and I say its supply will be capped at 1 million tokens (or 10 million, or 100 million - that's the "nice" thing about crypto, I can kinda choose whatever number I want), and then I'm able to sell 10 of those tokens for $100 each. According to FTX math, I now have $99,999,000 of assets on my balance sheet, but of course if I actually tried to sell a lot of my "kept" tokens I would tank the SCAMMER price.
Even better, and I think what is probably more common in the crypto industry: suppose I get my buddy to create a SUX2BEU token. I tell my buddy I'll by 10 SUX2BEU tokens for $100 each if he buys 10 of my SCAMMER tokens for $100 each. Now suddenly we can both say we have huge assets on our balance sheets! Until, of course, someone decides to pull aside the curtain covering the wizard.
Paul Graham wrote an essay years ago in which he described the moment when he realized that most of the dot-com companies in the late 90's were selling their ads mostly to other dot-com companies, who were buying their ads in turn. It looked like growing revenue for everyone, but once it came time to show a profit, all of it came crashing down...
Ad-supported mobile games seem to work like this too, all their ads are for other free ad-supported mobile games. Also I downloaded a QR code scanning app and every time I tried to scan a QR code it showed me an ad for another QR code scanning app lol.
The whales foot the final bills though. Unlike the vc's money which goes through economical cycles, there will always be suckers for those gacha gambling games
There are two types of whales. Those who plow an objectively large but relatively (to them) small sum into the game are fine. Those who fell victim to psychological programming to feed every dollar in are not.
Even if it cost a few dollars to me (to equal their $10,000 for example) I just wouldn't do it. Just feels like I'm being taken for a ride... which doesn't feel good haha.
Same way with games I enjoy. I never tend to buy the "skins" or "cosmetics" unless one _really_ clicks with me.
The trick is that you have a big chunk of your social graph in the game
You aren't spending $25 on video game shit, you're spending $25 on a fun skin to show your pals, or upgrades to help your friends beat some boss, or whatever
Once you get on that path, it can lead pretty normal people to some very dark places indeed
At least those people are getting something out of game. Completionists/collectors having their OCD taken advantage of are going to an even darker place.
Ah... I think you've given me the missing puzzle. I will say I don't get sucked into those "one up" wars (I really hate spending money on things I feel are gimmicks) _but_ this makes a lot more sense.
That's because the easiest to get new customers for a mobile game are the ones who play similar games but not yet this one. The customers then play the game and buy more in-game currency than was paid for the ads.
I should have been clearer, it’s more for debugging - so I need to read the content of the code rather than actually opening it. Eg if there’s an app configured for it then scanning with the built in camera just opens that app and never displays the content.
I’m on iOS, tried a few but they all wanted a subscription and were a terrible experience without it. So I wrote simplescan.vercel.app / https://github.com/mcintyre94/simplescan which does the job for me! Though Apple have broken using the camera when you save it to your Home Screen and open it as an app which is annoying.
> I’m on iOS, tried a few but they all wanted a subscription and were a terrible experience without it. So I wrote simplescan.vercel.app / https://github.com/mcintyre94/simplescan which does the job for me! Though Apple have broken using the camera when you save it to your Home Screen and open it as an app which is annoying.
Ah, that explains it! Your usecase explains it, but I'm reasonably assuming Android because recent iOS versions have it built-in.
But aren't startups doing the same thing as PG said nowadays? That is, portfolio companies use each other's products to boost their revenue and user base.
> According to internal documents viewed by CNBC, SpaceX has spent more than $160,000 on the Twitter ad campaign for Starlink in Australia and Spain so far.
Your definition for "a bunch" is a bit questionable, but good on you for posting the source.
You can get a lot of impressions for 160K. You buy them in batches of 1000 using a term called CPM, which is cost per thousand [1]. CPM can be around 10 dollars for a really good segment. I'm sure there there are some adops folks that have a better knowledge than me. So, if CPM is $10, then that gives you around 1.6 million impressions.
[1] That's right M is for a thousand, because M is a thousand using Roman Numerals. You thought you would never have to remember that.
The ad campaign SpaceX is buying to promote Starlink is called a Twitter “takeover.” When a company buys one of these packages, they typically spend upwards of $250,000 to put their brand on top of the main Twitter timeline for a full day, according to one current and one former Twitter employee who asked to remain unnamed because they were not authorized to speak on behalf of the company.
Which means 160k spent is actually well below typical deal and these deals are pretty normal for Twitter. So one may actually be worried that maybe SpaceX got a deep discount or something.
Okay but how is that still not a bunch of ads? Do you think it's one ad for $160k? Or maybe like many ads? Perhaps it's so many ads we can call it a 'bunch'?
I have no idea how many ads is that. Could be just one ad on the top of the timeline (which obviously would be shown to many people). The point though 160k spend is not a huge deal - actually below what usually happens with ad campaigns on twitter.
In a way, that that is _notable_ today is evidence that the dot-com advertising problem _isn't_ notable today. In 1999 that would be just What You Did, and not really worthy of comment.
Just selling to other early-stage startups doesn’t generate much growth/revenue or make you look like a solid business to a sophisticated investor. SaaS/B2B companies that make it big do so because they get huge numbers of small-medium businesses using their platform, not just startups - E.g., Slack, Stripe, Square, Shopify, Canva, Zendesk, Zapier, Segment.
Having other startups using your product is a good early source of product feedback and a strong signal to very early-stage investors, but that alone doesn’t give you the huge growth you need for bigger funding rounds.
It’s very different to the scenario PG was describing in the late 90s; in those days, a startup would be founded, quickly IPO to raise several $million from unsophisticated retail investors, then spend much of it on advertising on Yahoo to drive traffic and artificially push the share price up. Hence when the music stopped in 2000 all that ad spend dried up and Yahoo’s share price crashed.
All those companies I mentioned above are going fine; slowed growth, sure, but they have real businesses with broad customer bases well beyond the startup ecosystem, so they’re all able to continue operating and keep doing OK.
Still, in B2B you typically want to show you have some megacorp logos (in particular due to larger deal size and up-sell potential), are attractive to different industries, et cetera. So this may be a known issue, but it's also considered when assessing startups.
If, at bottom, they are all also accomplishing something, then it's ok that they are using each other's product. If the whole web of startups selling to other startups is not actually accomplishing anything much except burning VC cash, then it is in fact a problem (one which will be resolved soon, I expect).
I do think of this a bit when I see startups being the main customers of other startup’s products. For e.g. I’ve never in my career at big orgs and small orgs alike had authority to just go and purchase $50/dev/month on productivity tooling for my teams, so I’ve never quite worked out who is paying for these
Which is a solid plan. Unless, of course, you buy the shovels with futures on potential gold finds and expect the resulting shovel rush to go on forever.
There is an exact answer to your question, and it has nothing to do with the size of the company: a startup is a company designed to grow fast. Everything we associate with the success of a startup is a byproduct of growth.
With that definition, AWS is a startup. So was the iPhone. Both invented their respective markets, and had to grow quickly to do it. If either of them had needed to raise money from VCs, smart VCs would’ve invested. But they didn’t need to raise capital, since they were already a successful company.
I mean... a little disingenuous. AMZN was a $10-20B publicly traded company at that time. When is it a startup vs a product offering of an established company?
I think it's a bit unfair to characterize every company that is "starting" as a "startup", particularly when the "startup" in question is/was backed by one of the largest companies on the planet. I don't think people think of such companies' endeavors as startups, even when they are starting.
You mean when they separated internal infrastructure of the largest ecommerce in the world to the point when it was possible to sell it in commodified pieces to other businesses?
That is not what happened and is a fake myth origin story. AWS was started from scratch with a small team in south africa. The best description of all the myths and the real thing I've heard is here: https://www.acquired.fm/episodes/amazon-web-services
It sounds good to perpetuate the "but Amazon.com had extra capacity they could sell" but it's not true.
The shovel-seller isn't necessarily also a prospector. They do, however, make a lot of money off of prospectors, whether any gold gets ultimately found or not.
But, when the gold rush is over, the shovel-seller may have to do big layoffs.
This is a rich observation, since (anecdotally) it seems like all the initial customers/traction for YC companies is from other YC companies.
Nothing wrong at all, it's good to bootstrap an initial customer base and get some user-feedback, but until the chasm is crossed to "real" customers, one could argue that this is the same case nowadays. So the dotcom time was no better nor worse than right now in terms of startup viability.
The housing market was the same way in 2008… in fact the entire global financial system is built that way. It’s what they mean when they say there are $60 trillion (or whatever) in derivatives out there, a long chain of the same assets rehypothecated over and over. It works though, mostly
I somewhat disagree with this on the surface. 2008 was a byproduct of banks holding ratings companies (Moody's and Standard and Poor's) hostage. The banks gave completely fraudulent ratings to loans, the ratings companies falsified ratings on packages, and eventually the house of cards came tumbling down when enough people tried to pull their money out.
There is a way to rate and classify derivatives appropriately, you just can't hold the ratings people hostage. I don't think there's a way to do that with crypto.
It was also a function of banks bundling and rebundling junk debt into “synthetic products”; hence the good observation on banks repackaging the same assets in different ways. The same as happened in crypto, in an even more sophisticated way that few people (at least retail investors) can’t really grasp.
The banks weren’t to blame for 2008 any more than were the hoardes of FOMO buyers - in that they were both pretty culpable but neither of them were the real problem.
Lax regulation of the rating agencies was the real smoking gun. I’m not even sure it was ever addressed given all the banker witch hunts that ensued, and will next time too.
Dave Chappelle was on Saturday Night Live this past week and did a bit in the monologue about why we can’t have good regulations. Worth checking out:
A lot of those "FOMO Buyers" lied on their mortgage applications and suffered no repercussions. In fact, many of them ended up doing quite well despite crying "Boo Hoo! I lost my house."
The spent their HELOC and never had to pay it back, they took the "first time homebuyers tax credit", and many of them lived in the house they "bought" for a year or two without paying any mortgage payment until the bank finally took it back. They never paid income tax on any forgiven debt, and they never paid income tax on the imputed income from living in a nice house for a couple of years rent-free until the bank finally was able to take possession of it.
It is surprising that so far there haven’t been any legislation in Europe that prohibits CO2 emissions and energy consumption for crypto mining. Feels like a slum dunk to get it passed and get some nice political credit for it.
I'm not mining, I'm heating my winter swimming pool with this ASIC based heating elements!
Tax any externalities and let the problem solve itself. Yes, you might end up with some heated sidewalks or other conspicuous consumption, but at least you end up with resources that can counter the problem.
It would be a good statement and might set off a chain reaction for other countries. At any rate, a country that isn't very dependent on crypto mining would be a good place to start the bans.
> At any rate, a country that isn't very dependent on crypto mining would be a good place to start the bans.
Is there any country that's dependent on crypto mining? I think you may have meant the inverse--a country that crypto mining isn't dependent on (like it was on China... until China banned it a few years ago).
The chain reaction is that other miners get more profitable when EU bans it in their jurisdiction. Then some small countries with cheap energy will invite new miners to come in and tax them.
people pay in, and that money is spent on (making the project look good|delivering a yield|paying execs|propping up a trading company|whatever) and then the money is not there anymore for withdrawals. That's the essence of a Ponzi scheme and this meets that criterion.
Sure, there's fraudlent accounting, and wash trading, and other bullshit, but that's all just the some and mirrors that allows the ponzi scheme to work.
a ponzi scheme reports a profit, and pays out that profit to early investors. (the payout is actually later investors inflow.)
the only one of the ones you mentioned that is actually a ponzi scheme is the "delivering a yield." its the yield delivery, aka dividend, that makes it a ponzi scheme, not just fraudulently running away with the money. the scheme works because people get paid out regularly, and have no reason to believe their money isnt working for them.
""" You can now earn yield on your crypto purchases and deposits, as well as your fiat balances, in your FTX app! By opting in and participating in staking your supported assets in your FTX account, you’ll be eligible to earn up to 8% APY on your assets. """
How does one provide 8% yield on BTC I have no idea.
To me, FTX is a classic Ponzi scheme according to the most uncontroversial definitions of "Ponzi scheme".
You are wrong. In a ponzi people are often encouraged to reinvest their gains. You only take the money of new investors to pay out early investors if really necessary (that is to maintain the illusion that the money is still there) otherwise you use the money for something else or yourself.
Just because that is a common feature of ponzi schemes, that alone doesn't make it a ponzi scheme. A ponzi scheme takes some sort of initial investment from new investors and gives that back to old investors in form of "return". Meaning, the system itself doesn't rely on any sort of growth in order to return, only the sign up of new people into the scheme, which is why they can seemingly deliver such reliable returns to early investors. Eventually you run out of new people to sign up, and the entire house of cards falls apart very quickly.
Every self printed clown bucks scheme is a standalone Ponzi by definition. Early gamblers buy first batch of clown bucks, then hype the price, then next group of gambles buy slightly more expensive clown bucks, then hype, then then buy, in a loop, and each new buyer funnels his money onto enriching early gamblers. The only difference is that FTX has at least 3 Ponzis running - FTT, SRM, MAPS. We can call it a Ponzi CDO of sorts :) but it's still a Ponzi. Sure, they did some exchanging on the side, some investing or donating, but the main business was printing and selling clown bucks.
>Early gamblers buy first batch of clown bucks, then hype the price, then next group of gambles buy slightly more expensive clown bucks, then hype, then then buy, in a loop
That is not a ponzi scheme. The selling of the asset to the next sucker, and the price going up, and each person in line getting to shave some profit off the next person is not a ponzi scheme. (It's also exactly how non dividend end paying stocks work. The stock is only worth what the next person is willing to pay.) Youve described a pump and dump.
A ponzi scheme has a mechanism to give a fraudulent "RETURN" to investors that HOLD. That is the definition.
None of the clow bucks are claiming that the underlying product is producing its own profit, the only value is the holding of the asset itself.
Everyone is now using ponzi to mean any sort of scheme including ponzi, pump and dump, etc. But thats not what the word ponzi actually means. And when you say things like "by definition" we need to stick to the actual definition.
That’s a common problem when dealing with illiquid assets and not a characteristic of just crypto. For example a VC firm buys 10% shares of a company valued $1B at their latest round. Then the market tanks but no one really knows what these shares are worth because they are not trading anywhere so you don’t have a price to mark them. As a result you mark them in your books with the latest round price at $100m even though they might be worth much much less.
This is different. In the case of the VC who bought shares in the startup, they at least have the price they paid for the shares.
In the case of crypto companies who create their own tokens and then use them as collateral, they never actually paid anything for the tokens they own. There's not even a cost basis. It's entirely made up.
Not only is what the crypto companies doing much worse, but it is rare for VCs to leverage their investments in companies. It's not like their fund is levering up 2:1 and buying companies, like a PE fund does, because in the case of VCs their investments are usually not producing cash flow. But in the case of some of these crypto companies, they were levering up using collateral of tokens they made up that they never paid anything for.
It's much, much worse than anything recently seen in finance. CDOs were bad in 2008, but at least the mortgages were a secured claim on a physical asset that someone actually paid something for.
It feels like you're stretching here. If I cut squares of paper and call them Ponzi Coins and then mark them in my books as 100 Million in assets, well, I'm stretching that definition. I've also created more "assets" than the average crypto coin. Maybe it's as simple as adding a word, fake. The coins are fake assets. Otherwise, the words lose all meaning in the context of finance (assets and liabilities).
Except many are tradable on a market, just like securities and other assets.
Also; stock in private companies is often not tradeable at all, but no accountant is going to call those fake.
There are multiple ways of plausibly pricing assets.
None are generally accepted that would let someone just make up a ridiculous valuation and stand up to any scrutiny, but people can always do what they want until the auditors show up anyway.
At the very least, a bank can look at stock in a private company, and before accepting it as collateral, demand to see cash flow and income statements, and perform its own valuations based on revenue, earnings (if they exist), debt to equity ratios, and things of that nature. With a token, pretty sure the analysis on that level becomes "so you just made these up?"
Now, whether or not this is how banks act in practice is another question. It is, perhaps, how they should act if they're being conservative, but it is likely that others will swoop in and often enough grab that interest for themselves. And in the rate environment we've been in until very recently, those are likely the banks that have managed to survive in many cases.
How about various forms of IP? They're just intangible rights. They give you a certain monopoly, which is one (admittedly odd perhaps) way of describing a cryptocurrency (or anything encrypted when only you have the key).
The fundamentals for your ponzi coins are so bad they might as well be worth zero, so why would that insignificant value difference matter anyway?
IP is valued on it's ability to generate revenue. This is why the patent on swinging sideways in a playground is worthless, but the patent on the telephone was extremely valuable.
It boggles my mind that lenders aren't all wise to this nonsense, and severely mark down these assets, if not completely refuse to allow them as collateral. I suppose that at least many banks got very hard up over the last 10 years of next to zero interest (next to on one side or other of it depending on where in the world they operate), so they were probably more willing than usual to lend money for the chance at getting a return on it. Curious to see which banks are getting hit hardest for exposure to FTX loans -- that hasn't been something I've been hearing much about yet.
Company have valuation would be based on recorded revenue, profit or at least growth rate. When buying a stake in a company, there is a whole legal framework and due diligence. Crypto token just have the bunch of wash trades to support theirs valuation and no transparency.
Although, according to Matt Levine who writes Money Matters, that can sometimes be a feature instead of a bug whereby private firms are better able to ride bad market conditions than public firms are.
In some cases you could see it being positive not having your stock price drop everytime the Fed announces a new rate increase or jump everytime they don't (or etc etc with other events) if your primary goal is to continue at a steady pace to achieve some goal.
Small note: it’s Cliff Asness from AQR who came up with the illiquidity “premium,” though Levine does report it a lot. This matters a bit bc AQR is a large hedge fund that trades in liquids and therefore is marked frequently… there’s a bit of self-serving bias here (although may still be true).
No. You can’t just make up the book value of your assets. You need some sort of justification, and these are, for public companies, strictly regulated.
It's quite interesting, and essentially what happens is that a pairing pool is created, ETH <> Shtcoin for example. So now for that shtcoin to have "value" it needs to be liquid within the pool, ie can go into ETH. The cost of the coin is determined mathematically based on the ratio each side of the pool.
> In other words, suppose I create token SCAMMER, and I say its supply will be capped at 1 million tokens (or 10 million, or 100 million - that's the "nice" thing about crypto, I can kinda choose whatever number I want), and then I'm able to sell 10 of those tokens for $100 each. According to FTX math, I now have $99,999,000 of assets on my balance sheet, but of course if I actually tried to sell a lot of my "kept" tokens I would tank the SCAMMER price.
Anybody can do that, true. What you also need is credibility and willingness to destroy that. Look at Fried Bankman, he had had tons of pedigree and knew what ears to wisper too. He apparently wasn't saying anything smart and yet people believed him. He was even rude and playing videgames during meetings and yet people believed him. It's easy and yet it isn't. I think scammers have qualities normal people don't have and when all those line up we get a super bankrun like what happened in this case.
I think artwork also works this way. I have 10 piece of art drawn by Mr. Artist. My friend buys a piece for 1 million dollars, I now have ~9 million dollars of "assets".
These shenanigans have been going on for a long time in wealthy groups.
And then you donate the art to a foundation or charity and pocket a fat tax credit, thus avoiding the problem of having to actually find a sucker to pay $1 million. Some jurisdictions have cracked down on this, but for a long time it was a popular way to game the system.
As someone who has made a bit of money in crypto, there's no reason I can't be really dumb and morally impaired, but lucky. I will note that moral impairment and intelligence are not highly correlated as far as I know.
This isn't a ponzi scheme as others have pointed out.
This is well understood and goes on all the time in NFTs, it's usually called wash trading.
People in crypto know this is happening. The reason they still speculate is because it's hard to predict when it will collapse, and some people think they have an edge predicting that sort of thing.
>> So many ponzi schemes on top of ponzi schemes...
Isn't this what happened with Quadriga exchange?
The regulator said Thursday that Vancouver-based Quadriga's late founder Gerald Cotten committed fraud by opening accounts under aliases and crediting himself with fictitious currency and crypto asset balances, which he traded with unsuspecting clients.
On Thursday, the OSC attributed about $115 million of the $169 million clients lost to Cotten's "fraudulent" trading.
Another $28 million was lost when Cotten used client assets on three external crypto asset trading platforms without authorization or disclosure.
The OSC said he also misappropriated millions in client assets to fund his "lavish" lifestyle and because he was in sole control of the company ever since 2016, he "ran the business as he saw fit, with no proper system of internal oversight or controls or proper books and records."
I often joke that crypto has been run by gold bugs who were forced to "smoke the whole pack" on fiat currencies. So a lot of crypto is a nihilistic homage to federal reserve systems.
In that way, "DeFi" feels the same about the finance industry.
It was no secret that SBF hated traditional finance. And so I assume he refused to learn anything from it. But what he ended up creating was almost a hilarious parody of the financial system.
That's at least how I can square the circle about how someone who could criticize Lehman Brothers for letting themselves get overleveraged on shady asset classes could literally have negative 8 billion dollars in "Hidden, poorly internally labeled ‘fiat@’ account" and then publicly go to Twitter to say they have a "liquidity problem".
I can't look at their balance sheet and conclude that they were anything but ignorant of traditional finance. He seemed completely unaware of duration risk, and it seems like they have never talked to an accountant or anyone who has even the slightest clue about what a balance sheet should remotely look like.
SBF worked at Jane Street, but he must have been there in a capacity that insulated him from this sort of knowledge. At large firms such as that there are very specialized roles that juniors typically start within, where the visibility is fairly limited.
You think this is ignorance? I know very little about finance or the technology of finance but this is pretty clearly fraud and criminal behavior.
My only question is was he able to pay for his private jets or residences in FTT? He seemed pretty convincing to a lot of people so it would be interesting to see if everything was paid in his own made up currency.
I presume his walking around money was from loans from banks based on his equity in FTX. This seems to be like the standard thing that the super rich whose wealth is tied up in tech stock do these days.
He was handed billions in USD by VCs. I'm sure he stashed a lot of that in a Vanguard mutual fund while he made a show of operating his perpetual motion machine.
> I can't look at their balance sheet and conclude that they were anything but ignorant of traditional finance. He seemed completely unaware of duration
SBF is notorious for advocating expected-result decision-making with risk entirely disregarded, and essentially saying if you aren’t in the high risk range where the median (rather than expected) result is break even or worse, you are usually being too cautious; he's not ignorant of risk, just deliberately contemptuous towards it being a negative factor in decisions.
Turns out, when you chase Gambler’s Ruin that hard...
They knew this balance sheet was bullshit. They were just trying to cover up the $10 billion "loan" they gave alameda after it blew up in the spring. I agree that alameda made mistakes that traditional funds wouldn't, but the balance sheet isn't one of them.
I think SBF’s public and, AFAICT, honest belief in expected value optimization without regard to risk played a fairly central role in every step of the fraud, and that it constitutes a very specific form of incompetence.
That's an extremely charitable interpretation of the events, in my opinion. Misappropriating custodial funds is not ever acceptable when you are running an exchange, no matter how good your EV looks like.
And I'm not buying into his whole effective altruism thing. What I think is that SBF had a strong desire to make money, ethics be damned, but had a troubled conscience. Effective altruism gave him moral comfort and helped him rationalize his actions.
> That's an extremely charitable interpretation of the events, in my opinion.
Only because you seem to be reading into it a positive moral judgement that I did not, in any way, express.
> Misappropriating custodial funds is not ever acceptable when you are running an exchange, no matter how good your EV looks like.
I didn’t say it was.
> And I'm not buying into his whole effective altruism thing.
SBF doesn’t just advocate that method of decision-making in the context of EA, he advocates fairly consistently for financial and other decision-making.
It seems I read too much in your comment. I can agree with labeling his method of decision-making as incompetent but I believe what happened at FTX goes beyond that and I just hope he doesn't get away with it by playing that card.
> worked at Jane Street or other big name financial firms. They weren't ignorant of traditional finance
I was an options market maker. That taught me a lot about options but little about finance. The latter comes from curiosity and initiative, up to and including reading history books. Given SBF was post book or whatever, the ignorance isn’t surprising.
Did you read comments Caroline made on her blog/tumblr?
Not sure of the timeline but she was asking why not double down on a 50/50 bet every time (if you lose) - you can earn "infinite" money but lose only your bet.
I am not sure working somewhere means you are an expert in it. It's incredible these people managed to create a company size of FTX.
>Not sure of the timeline but she was asking why not double down on a 50/50 bet every time (if you lose) - you can earn "infinite" money but lose only your bet.
From one of the screenshots in that post, Ellison says:
> (I'm not an expert on traditional finance but my impression is that it's a lot more boring; largely brokers will just try and have margin requirements conservative enough that it's very unlikely for you to
actually lose all your money.)
So I knew this guy who used to game the customs at New Delhi airport. Back in the day he would fly over to Singapore, buy some expensive electronics, and try to get it past customs without paying duty - he was a "mule."
There was one particular customs agent who knew this guy and would catch him. The mule would pick flights during that agent's shift - told me that it was boring otherwise.
These kids were getting a kick out of risky trades.
3. "conservative enough that it's very unlikely for you to actually lose all your money."
This tells me they knew what they were up to and they didn't really care - it was part of the game.
The whole saga is fascinating. Can't wait for the book/movie combo to come out.
And is that a problem? "traditional finance" is a sprawling subject. There are literally four year degrees on "finance". Yet, jane street hires (a "traditional finance" trading firm) regularly hires people with only mathematics degrees to trade for them. Other hedge funds/trading firms do the same as well.
> 2. "it's a lot more boring"
>There was one particular customs agent who knew this guy and would catch him. The mule would pick flights during that agent's shift - told me that it was boring otherwise.
>These kids were getting a kick out of risky trades.
Don't you think you're reading a little too much into this? Someone calls traditional finance boring so they must be some sort of adrenaline junkie?
>3. "conservative enough that it's very unlikely for you to actually lose all your money."
>This tells me they knew what they were up to and they didn't really care - it was part of the game.
In some ways traditional finance's margin requirements are more conservative. Regulation T specifies that for stocks, initial margin is 50% (ie. if you buy $100 worth of stocks, you need to pay for $50 out of your own pocket), and maintenance margin is 25%. A quick search says that FTX's margins are 10% and 5% respectively. However, in other ways traditional finance's margin requirements are looser. Because they expect that the lender is a legal entity they can go after, they're much more lenient when it comes to liquidating customer's accounts. That's how lenders got burned on Archegos, because Archegos were giving excuses, the lenders believed them (also, liquidating your customer is rude and they don't want to lose their business), and didn't liquidate them. Crypto on the other hand is far more conservative in this regard, because they basically assume that the only assets you have are the assets in your account. To that end, crypto exchanges (including FTX) have margin monitoring 24/7 and will automatically liquidate customer accounts when they dip too low. So to get back to your original point, they do care, and it's something they thought long and hard about.
Still the whole blog and her various public interviews are wild. I know we are operating with the benefit of hindsight but I find her very unconvincing - for example when asked about math in her job she said she doesn't use any really, except maybe elementary school math. That you only need to be able to take some risk (laughs awkwardly).
Rookie mistake! The trick is to double your betting amount every time you lose the 50/50, until you win, and then return back to your regular bet. That’s how you turn a profit. (/s)
> read comments Caroline made on her blog/tumblr?
Isn't that the Martingale strategy?
> It's incredible these people managed to create a company size of FTX.
Didn't they got hundreds of millions in play money from their network (school friends). This worked while everything was going up and new cash was coming in.
Being an entry level staffer is not the same as running a n-Billion dollar business. The higher you rise, the more important the role of governance, compliance, and risk management becomes. If you shortcut this you will miss an important part of "job experience"
Maybe you should spend a moment researching rather than using some nebulous transitive property of "if they hired this person, they must also be a scam."
Jane St is a prop trading firm - the only money they have to lose is their own.
I work in the trading industry. These people had short tenures at JS, especially Ellison. They weren't seasoned senior traders making big decisions. JS, unlike Alameda, has been in the business for 20+ years and have been very profitable for most of their existence.
It would be worrisome if most of Alameda was full of ex-JS traders, who had been there for 7+ years.
One of the biggest financial frauds of this century has just been perpetrated by two young people that used to work for them, the questioning related to "how did Jane Street hire these people" is perfectly logical.
Well the interview process is more or less "are you good at probability puzzles and games somewhat related to trading."
A plausible story to me is that they were good at whatever they screen for in the interview and then at Jane Street they made a bunch of money. Then they attributed too much of that to themselves and not enough to whatever institutional processes and risk frameworks they benefited from. They bring themselves but not those processes to their own trading firm, and then boom!
I worked on quant buy side for a long time and you dont just automatically come out of these places knowing one secret to making money trading. equally smart on paper people might be working on message passing, risk management, data analysis, special projects, also trading, simulator, database, and might spend 5 years in-house and not come away from the experience with knowledge which by itself represented major alpha.
for me just knowing how to setup a quant trading firm, how to choose prime brokers, how to find and select vendors, leased lines, how to setup paper work, cap intro relationships, exchange memberships, FIX certs, are of equal value as alpha tricks, and really I dont even see a lot of evidence that the Almeda / FTX people were particularly well-seasoned in any respect.
How would Will MacAskill have enough sway to get SBF in Jane Street? Also, why would that matter? I have absolutely no reason to believe SBF couldn't pass their interviews.
The Societe Generale guy that managed to lose 5 billion euros for the bank through "breach of trust and forgery" (to quote wikipedia [1]) didn't work in the risk management department. I don't think that was any consolation for the bank's stakeholders.
> Jane Street risk controls from people who didn't have that role.
I'm talking about the Jane Street risk control people not being able to filter out two of the biggest fraudsters of this century. Yes, I know that, technically, the Jane Street risk control people most probably only focus on the risky stuff that might bring their house down, and, as such, they most probably wash their hands when it comes to the deeds of their former employees, but I was under the impression that when those sort of shops hire someone there's also a general screening for "is this a guy/lady that is going to swindle billions of dollars in the near future"?
And, to be honest, I guess that's what the cachet of people like SBF was, especially in a very deregulated and wild market like crypto is. More exactly "normal" people would have thought along the lines of: "this guy has worked for Jane Street -> I've read Jane Street are cool, honest people, so they must have done some vetting of their employees -> SBF most probably won't run with my money".
More generally speaking, as you most probably well know, the whole house of finance is built on trust and trust alone. That goes for crypto, that goes for traders like JS, that goes for boring money market funds, that goes for the FED itself (probably with trust decreasing from Fed -> to MMFs -> to traders -> to crypto).
When such swindlers like SBF and Caroline Ellison both happen to have worked at any one entity that's part of that chain of trust that I mentioned, then said entity can't just wash its hand saying "well, we checked out on them, they were fine when they used to work for us", it doesn't work like that. People will start asking themselves: "Are there other swindlers now working for JS that JS has failed to catch during its vetting process? If yes, do they risk bringing the whole JS house down?".
Well, then we're going to have SBFs and Kervels going well into the future. Kervel was 5 billion, SBF is, what, 10 to 15 billion, going by the same progression in 5 years' or 10 years' time the next guy is going to swindle 30 billion or so.
All the while the IBs and the algo traders and all those fancy financial shops will keep saying: "how could we have known? We're not mind-readers! These are not our people!". Madness.
Also, by "JS risk control" people I was not only thinking about the spreadsheet guys. I hope to the gods of Mammon that there still is some sense of "is this guy trustful? Does he belong in this trust-based industry?" active inside of those firms, and, no, I don't expect the spreadsheet guys from credit risk to be in charge of it.
If you're telling me that "no, there's no such department in any of those institutions! Any crook can get hired as long as he passes the technical interview" then I think the industry has a whole has a big f.ing problem.
It's not about losing other people's money only. What I'm worried about is: are extremely over-leveraged and able to get the returns they have by doing tax and regulatory dodges that their competitors aren't participating in? Did SBF learn how to operate in the financial world from seeing how Jane Street operates?
Knight was the largest market maker on NASDAQ and NYSE at the time they blew up so if you're going to use "they're just a market maker" as a defense for JS you can't dismiss Knight as "oh, not THAT kind of market maker." And Knight was known for plenty of shady activity like front running and spoofing.
Knight did not blow up due to fraud, so they were not "below board." Losing money is not against the law.
Furthermore, Jane St only trades their own capital - ie. not capital deposited by customers in an exchange and not capital provided by selling ownership stakes of itself on a public market. This is a clear distinction from Knight.
It's as if some guy just had a bunch of money, traded it and made some more money, hired a bunch of people to keep trading it, and it has made a ton of great returns and people are asking: is this a scam?
Who would it be scamming? The only suckers are this guy.
This is what I have been thinking. This whole thing has soured in my mind: Jane Street, Effective Altruism. Crypto, VCs, Silicon Valley culture in general I already assumed are scummy.
The practical version of Effective Altruism for most people is essentially "if you're well off, you should donate a chunk of your income to buying anti-malaria bed nets/deworming medicine/direct cash transfers for the global poor". I don't see how that could "sour" in your mind, seems like a fairly unreservedly good thing.
I want to point out that there are real people [1] being helped by Effective Altruism right now. Telling them "sorry, can't help you any more, some rich asshole in the US just committed a scam, and he claimed he wanted to help you too" just seems incredibly petty and cruel to me.
[1] - This is also a group that traditionally doesn't receive much attention either.
This is why so many people find EA annoying. People donated to malaria causes well before EA was a thing, but of course now, without EA, there's nothing.
I find it very annoying. Why I’ rely on the benevolence of a few rich people when you can do the same much more effectively with proper taxation and wealth redistribution.
All the mainstream political suggestions for taxation/wealth distribution focus on correcting wealth inequalities within a rich nation. Very few (if any) suggest redistributing from wealthy western nations to the global poor.
I don’t think upper-middle class programmers were donating much before EA.
Obviously AMF has been around before EA, the big difference is the additional amount of money it’s been able to deploy. I personally know many people (including me!) who started donating significantly because of EA.
"if you're well off, you should donate a chunk of your income to buying anti-malaria bed nets/deworming medicine/direct cash transfers for the global poor" (c)
Isn't it against EA ethos? Helping some people right now, right here? I read some posts about this movement, and from them it seemed like EAs are more interested in the far off stuff - developing benevolent AI, transumanism, space travel, gene vaults, terraforming, Mars colonisation etc. (there is nothing wrong with these activities). Because helping people right now is "just" altruism, not effective altruism.
The longtermist EAs do suggest that, but by dollar donated, the more traditional global health stuff is still a large chunk of what EA do.
> I read some posts about this movement, and from them it seemed like EAs are more interested in the far off stuff
You can’t really use that as a metric to judge the movement, since there’s only so much one can write about “donate money to AMF”, but you can write pages and pages about the far off stuff.
```Palo Alto (/ˌpæloʊ ˈæltoʊ/; Spanish for "tall stick") is a charter city in the northwestern corner of Santa Clara County, California, United States, in the San Francisco Bay Area``` - https://en.wikipedia.org/wiki/Palo_Alto,_California
Perhaps not ignorant but maybe inexperienced for the roles and responsibilities they assumed at their new company? This is from a piece about Caroline Ellison the CEO at Alameda:
>"Before joining Alameda as a trader in March 2018, Ellison spent 19 months as a junior trader at Jane Street after graduating from Stanford University with a bachelor's degree in mathematics in 2016. In a podcast two years ago, Ellison explained that Jane Street was her first job out of college. A diehard mathematician and Harry Potter fan born of two economists, Ellison she hadn't wanted to go into trading but "just didn't really know what to do" with her life.
> "She was persuaded to join Alameda by SBF, who also previously worked for Jane Street. When she quit Jane Street, Ellison said she felt bad for staying such a short amount of time. However, this feeling quickly dissipated when she arrived at Alameda and discovered that she had "kind of more trading experience than a lot of Alameda traders," anyway."[1]
And similarly for Constance Wang the FTX CEO/COO:
>"Constance Wang joined FTX as chief operating officer in the Bahamas in 2019. Initially, she was chief operating officer (COO) of FTX's crypto derivatives exchange. In January 2022 she was promoted as CEO of FTX digital markets, with responsibility for the Bahamas HQ. An org chart published by the Information puts her one level below Sam Bankman-Fried.
>This looks like a big job. All the more so because Wang is only a few years into her career. Before she joined FTX, most of her time had been spent at Credit Suisse in Singapore.
>Wang wasn't an MD at Credit Suisse. She wasn't even a director or associate director. She was an analyst and she worked at the bank for two years, first in KYC in the private bank and then in APAC risk and controls. It was her first job out of university.
"Admittedly, Wang didn't go straight from Credit Suisse to FTX - there was an eight-month detour to Huobi Global, a crypto exchange in Singapore first. However, the fact that this was sufficient to land her a job in her late 20s running 'institutional clients servicing and operational procedure,' at a fund with $1bn of revenues last year, looks slightly questionable."[2]
Lewis supposedly compared SBF to Luke Skywalker fighting Darth Vader CZ. He was probably writing a Flash Boys style hagiography. He'll have to rework the material now.
Doubt it, unless you have evidence otherwise. Jane St (unlike customer-facing finance firms, like Goldman Sachs) does not really engage in this style of nepotism hiring that I know of.
More likely is that the child of prominent academics might actually be more intelligent than average themselves and certainly provided more opportunity to flourish.
Well I went to a major feeder school and know a lot of people hired by JS.
The class of people hired by firms like Goldman Sachs is obviously nepotistic in nature and very different from the class that JS hires.
A substantial portion of the GS mix is athletes & what I would call traditional Northeast elites, Jane St hired mostly out of the top physics, CS & applied math classes I was in.
Beyond that, having parents who are prominent professors is nothing special at these schools and definitely would not give you pull at these institutions. Finally, Jane St has no incentive to engage in this sort of hiring because they are not customer/client facing.
Hahahah its the funniest thing I ever read. Some people are so doggedly invested in the believing myth of meritocracy. Yeah right a private firms hiring is totally meritocratic.
Cultivating relationships with influential people makes sense for an investment bank. Jane Street is a market maker, what exactly would they gain from it?
Could you detail SBF's experience that would have opened doors to him at Jane St without nepotism? I ask because I can't find any evidence to show how he was able to get into that position. Thanks for the guidance and I look forward to your reply.
I would exclude MIT from that list, but the rest of those schools basically have a huge reputation for grade inflation -- i.e., once you get in, you won't be given a bad GPA because you're paying so much. Grading people legitimately based on competence would piss of the parents/donors too much. Curious to hear your take on this.
My impression is that grade inflation is definitely a thing, I am not so sure that it is for the reasons you suggest (pissing off parents/donors/people paying for degree).
What grade inflation really means is that for many, if not all, majors at a school like Harvard, you can take a path of classes that will end up with you completing your major and having a high GPA.
That said, there are certainly classes that will be much less nice to you when grading and have a self-selected group of students. My guess is that if JS has enough people from, say, Harvard, they will know the difference between a student who took hard upper level courses to complete their major vs. just the simple basics.
In terms of why this grade inflation is so prevalent, one reason I think is that faculty want to have students in their courses/run a "superstar" course, and students select classes with the easiest grading policy. Schools like MIT (and Princeton as well) specifically combat this and so are known for grade deflation.
Does it matter? He did an undergraduate physics degree, the only time his name appears on Scholar is in a book of his mom or a letter from one of their colleagues, and when it was over he promptly went to some quant company that gobbles up these graduates by the busload (and spits them out again). The least important part in all of this is the grades, or possibly even what undergraduate he did.
From what I've heard about Jane Street interviews from people who interviewed there for intern and new grad positions, they involve solving mathematical puzzles about probability, statistics, and betting. I know multiple people who were invited to onsite interviews, including in one case for a trading position, who were in progress on math and computer science degrees, and had no specific finance knowledge. I also know people who have done trading internships at other firms with no finance experience.
It seems entirely reasonable to me that Jane Street would consider a Bachelor's degree from MIT in math or computer science, being clever, and a prior internship at Jane Street as qualification to work at Jane Street.
>It was no secret that SBF hated traditional finance.
That is quite odd. FTX was the very definition of traditional finance (with or without whatever regulations you may think is required). Maybe he was bullshitting you too?
Crypto is now infested with Wall Streeters and VCs trying to convert it into some grotesque form of the old system they are familiar with and failing catastrophically. In a few years decentralized DEXs will all but replace the centralized exchanges.
It's a grotesque level of criminal fraud, but unlike when that happens in traditional finance, there will be no bailout. These fraudsters will get wiped out and there is no one to appeal to who can save them.
These fraudsters and others will get wiped out. That's the bummer about this whole event.
You may feel that the others were too greedy and naive, and therefore deserve what they get. Perhaps. But they're still getting wiped out, and they didn't participate in the fraud. (Unless you consider all of crypto to be a fraud...)
Sometimes, the best way to train children to avoid putting their hand in the fire is not to be overbearing and make certain they never get burned, but to let them make that mistake and get burned a little so they viscerally understand the consequences of doing such a dangerous thing. If you never let them get a little burned, then they might get terribly burned when you're not around to pull them out.
Losing tons of money is not the end of the world, even if it can feel like it. It might just mean you have to swallow your pride and go work at Walmart or McDonalds for a while to build yourself back up. Millions of people live that life every day.
There are a lot of people who already work at McDonalds or Walmart that watched FTX's super bowl commercial and knew about the "whole crypto thing" that, too, are wiped out.
I'm enjoying this shit as much as anybody but unsophisticated people are certainly feeling this right now.
Oh, don’t be a daft. First, they gambled a fraction of a percent of their portfolio into FTX. Second, the OTPF is one of the best-managed, most-successful funds: they will never be in a position to require bailing out. Your claim is, to be precise, horseshit.
> It was no secret that SBF hated traditional finance.
Uh? The guy worked in traditional finance for a few years and was pushing for more regulations on cryptocurrency. His parents were compliance lawyers. He donated tons of money to the democratic party to push for regulations. He ran a centralized exchange. This does not exactly scream DeFi... He was just an opportunist who saw crypto as a means to get rich quick and apparently, getting rich from trading fees was not quick enough for him.
There are a lot of "gold bugs" types in crypto but they mostly self-custody BTC and stay away from shitcoins and day trading.
> I often joke that crypto has been run by gold bugs
You're not wrong. Crypto is the natural evolution of the gold bug.
Gold bugs funamentally don't understand the finance system. The gold standard was never about fully backing your currency with a global commodity (fun fact: the US dollar was never 100% backed by gold reserves). A gold standard is actually just a peg, a promise by the government to exchange dollars for gold (and vice versa) at a fixed rate. And you don't technically need any gold for that.
Yet gold bugs harp on about gold reserves and that's the least important part of the gold standard. Either way you have a trust issue. FDR famously performed a sovereign debt devaluation, for example.
Likewise, my experience with crypto people is they too (generally, not always) don't understand why the TradFi system is the way it is. Worse, they seem to use wilful ignorance of that as a badge of honor (while muttering something about "disruption").
So gold bugs who (rationally or irrationally) hate TradFi find a natural home with similarly minded Crypto Andys.
I think you're debating a strawman, though. Sure, there are delusional / ignorant goldbugs who make stupid arguments, but you can find that in pretty much any domain. There are also reasonable people, including heterodox economists, who understand the history of currencies and monetary systems, and still advocate for a return to pegged currencies or for precious metals as a part of a diversified portfolio. You don't have to agree with them, but ad hominems are probably unnecessary.
I mean, it's not even that fringe is you consider that Central Banks sure hoard a lot of gold specifically because they see it as useful in certain (bad) economic scenarios.
>the US dollar was never 100% backed by gold reserves
The dollar was created by the coinage act in 1792, with dollars being made of the equivalent amount of silver or gold. To me this seems like practically same thing as being 100% backed by gold reserves.
If we're talking about paper dollars or originally "Demand Notes" from 1861 onward that would be the case as they were put in place because the government was broke trying to fund the Civil War,[1] and had to issue currency on credit[2] (about $1.5b additional in todays dollars, for comparison there's about $51b total in 2021).
>A gold standard is actually just a peg, a promise by the government to exchange dollars for gold (and vice versa) at a fixed rate. And you don't technically need any gold for that.
Wouldn't you need enough reserves to allow anyone who attempted to exchange their dollars for gold to do so? Fractional banking and bank runs seem like a rough analog.
Regarding gold/silver backing - yes, if they let you actually do that redemption or exchange. Something that has historically been suspended or banned multiple times. Including by FDR in 1933, and Nixon when the US exited the gold standard entirely.
If I remember right Nixon's exit from the gold standard was at least pitched to the public as a temporary measure, and his team was slightly surprised at how little effect it had in terms of causing panic.
I think to some extent we've been riding that initial wave of trust and backing. The alternative I suppose is we've figured out how to manage things correctly and no longer need a peg, but the lead up to the end of Bretton woods sounds ominously familiar to the 2000s. CBDCs seem like the only thing that could potentially fill a similar role.
"However, from 1950 to 1969, as Germany and Japan recovered, the US share of the world's economic output dropped significantly, from 35% to 27%. Furthermore, a negative balance of payments, growing public debt incurred by the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s...The American public believed the government was rescuing them from price gougers and from a foreign-caused exchange crisis."[1]
Most gold bugs I've interacted with are more interested in replicating commodity money (i.e. gold coins for trade) than gold standard (i.e. dollars backed by gold).
Gold standard is dumb for reasons you say. Commodity money is by design supposed to be 100% backed, as the gold is actually inside the money and the face value is the weight gold inside it.
There is a reason why there has never existed a society in which the majority of transactions were done by people exchanging gold or silver coins kept in little leather pouches. It's just too impractical.
- problems with availability - in most traditional societies, there just weren't enough coins to meet transaction demand, and so people transacted based on credit or other informal ledgers.
- problems with theft
- problems with weight
- problems with people shaving some of the metal off
- problems with counterfeits -- not actually easy to test the percentage of gold in your coin
- problems with credit markets. Credit markets need to move money around quickly and efficiently, and be able to raise large sums. That's not compatible with socks filled with gold buried under your rose bush. The money needs to be available in the credit markets so it can be efficiently deployed, moved around, etc.
So from the beginning, gold was used for specialized purposes -- e.g. to settle international trade or large payments, rather than as a primary means of payment.
There is no way to get around this. The moment you introduce gold, merchants will start borrowing gold by selling Bills of Exchange -- effectively promises to pay gold. These bills of exchange will be more valuable if they are bearer instruments, and so the merchant will make them bearer instruments (to allow raising more money). Then you get a market in which people are buying and selling bills of exchange at a discount. Now you have a discount rate and a money market, and all you are missing is a financial crisis in which a large bank steps to staff their discount window when the smaller traders are forced to close their own. All of a sudden, you are back to credit-based money, as the Bills of Exchange are themselves used to settle more trade than the gold coins. It's just a lot easier to carry a piece of paper that says "X promises to pay 1000 gold coins next year" then it is to actually lug 1000 gold coins around.
The ease of convenience, the needs of merchants to tap capital markets, will ultimately subvert whatever metallic standard you come up with. Then, financial crises will drag in the government to start regulating and centralizing the capital markets.
What you describe has a lot of merit but it also explains the move from silver currency to gold. Gold has a lot of interesting properties from the point of view of coinage and an instrument of value:
1. Up until the fairly recently (ie the last century) it was the densest element anyone could get in quantity. This was not true for silver so silver currency could (and was) debased (like you say). This was more difficult with gold as doing so would lower the density;
2. Gold has a relatively uncommon appearance. There are very few substances that could imitate its look. Iron pyrite (aka "fool's gold") is the common one but it's not as dense and is harder. It's also why people would bite into gold coins to verify it;
3. Shaving or cutting coins was actually more of a feature than a bug. Consider "pieces of eight" [1].
Previous metals as a basis for coinage were more important than perhaps you're giving it credit for. Ultimately what happened was that the coins themselves because a store of value and the metal content became less important as counterfeiting coins wasn't typically trivial. This of course was what ultimately led to paper money.
I've never stated commodity money should replace all other form of exchange. In fact per above, you list a system where both credit and commodity money exist in parallel with one another.
>It's just a lot easier to carry a piece of paper that says "X promises to pay 1000 gold coins next year" then it is to actually lug 1000 gold coins around.
Not sure if you've ever carried around a gold coin, or ~$1800 (the value of 1 oz gold coin). But the amount of space it would take up, within factor of 2.
~1.8 cubic inches for the gold and 1.2 cubic inches for the bills. So maybe 50% worse space wise for the gold, but in any case not enough to make carrying gold much more burdensome than cash. Sadly you can no longer obtain large (~$1000) bills as they have been eliminated pretty much worldwide.
> I've never stated commodity money should replace all other form of exchange. In fact per above, you list a system where both credit and commodity money exist in parallel with one another.
Perhaps I wasn't clear, but the phenomenon I'm describing is one in which the credit market grows to become more important than the metallic market and eventually destroys it, because in order for the bank trying to calm the crisis to credibly maintain that discount window open, it will need the power to create money in unlimited amounts (not actually to create it, but to convince investors that it can create it).
So what happens is that when credit markets are in their early stages, they go through violent disruptions every few decades that get more and more intense as the credit markets grow, and at some point, the survival of the economy as a whole is at risk, and sometime before that happens the government says "enough. We need an elastic money supply that can guarantee that bills remain discounted no matter what. We have to put an end to the cascading failures due to panics/manias in the credit market." That's when the metallic market is replaced with fiat.
So while you often hear how every fiat currency fails, you don't often hear how every metallic currency is replaced by fiat, and I'm trying to describe this process -- that functioning currency markets inevitably give rise to credit markets, and it's the credit markets that are required for capital investment and economic growth, not the currency markets. Thus the need for stable credit markets is inevitably what drives the abandonment of metallic or any other kind of inelastic money -- of which bitcoin is an example.
This is not to say that inelastic goods can't survive as a tradeables. Stamps even survive as tradeables. So do paintings. But they don't survive as currencies in an industrial economy that requires a large, steady flow of capital investment.
Valid, although once the gold is in my hands it's kind of hard to debase it. Of course the weakness is that it may be impractical to check it is debased every time you receive it (although it is practical for large transactions).
Each money has its own weakness. One of the big weaknesses with fiat and gold-backed money is that it can be debased even while it is in your personal possession.
> It was no secret that SBF hated traditional finance.
To point out: that’s part of the narrative SBF was selling. I wouldn’t take it literally. There’s a certain kind of person who can/will say anything, and seem sincere, just to get you to part with your money.
I hope the years ahead and the investigations that fill them produce a picture of a cartoonish mustache twirling villain. It would, as you’ve pointed out, make it so easy to understand. I expect something more nuanced and layered filled with self deception and good intentions might emerge. The sort of thing which reminds us that risk is not just that if gleefully explored possibility but also the sort of risk to be managed and mitigated … a dull retrograde conservatism rendered gauche by decades of SV VC survivorship bias. Time may tell.
A father catches his young son sneaking a cigarette. To teach him a lesson, he says, "You want to be a smoker, huh? Well go ahead, smoke this whole pack!" He makes him smoke all of them, the boy gets horribly sick from it, and never wants to smoke again.
Essentially it's a metaphor for forcing someone to go all-in on something they wanted just a little taste of.
I think it refers to the old punishment for a kid caught smoking. You catch a kid smoking a cigarette and then sit there and force them to smoke one after another until the whole pack is done. They get really really sick.
So the analogy is take something you like and then force it on you 24x7x365 until you hate every moment of it.
I assume this is a reference to catching a child smoking a cigarette, and to punish them, and put them off doing it again, the parent forces them to smoke the whole pack of cigarettes one after another.
This (in theory) makes them feel sick and develop an aversion to the cigarettes.
here is the problem in the a nutshell, SBF hired fraud scammers, several bad actors from poker scams where part of SBFs crew...indicating that something other than skill level was the factor in hiring.
Depends where you look. Solend and Uniswap have different risks, to use comparison AAPL and some new hot unknown tech stock have different risks. Uniswap does not have code to pause withdrawals, does not have a DAO or governance structure to change the contract.
Risk profile in Uniswap and established DeFi protocol is more transparent than FTX. You cannot verify and audit a CEX, you have to trust they are doing things right, or trust the third parties who audit them. If you are skeptical of Binance or Tether audits then you understand the want for open source DeFi.
This has got to be one of the most absurd situations I've ever seen. Absolutely fucking insane that this could have even lasted that long. Every single charitable interpretation of this situation, every single possible way that they could have somehow argued their way out of it being a clear scam, it's all just obviously stealing.
I think it's absolutely absurd that "smart money" was pumped into this to the tune of billions upon billions of dollars. The popularity of this delusion, and the madness of the billion-dollar crowd is so much worse than anyone could have thought.
Just the same old greed that clouded peoples minds. They saw BTC/ETH/etc. get pumped time and time again.
Some investors must have known it was a massive scam, but thought - hey, what if I successfully exit before the bagholders? What if I am the ONE that makes a fortune off this deal?
But alas, the thing with many of these crypto startups is that they crash and burn so fast. One minute they're worth billions, the next minute the founders have vanished or in custody.
Regulations are coming, no mater how much the crypto fundies hate it. Regulations don't conjure out of thin air, they are almost always reactionary measures. So maybe that's one good thing to come out of it all - these companies will be forced to be more transparent, as well as facing hard jail-time if/when they play with client money.
Absolutely fucking insane that this could have even lasted that long.
When things are good, Ponzi schemes appear smarter, hipper and more profitable than ordinary businesses and so no one want to run anything else after a bit. That's why the Fed is there to "take away the punch bowl just when the party is getting interesting" - because, whatever their other virtues, markets won't stop this before disaster strikes.
Instead the Fed has been pouring vodka constantly into the punch bowl since 2009. This bubble is primarily their fault and now after it burst they have decided to go the other way and raise rates into a recession.
Strongly agree. In normal times there are scammers and people trying to set up Ponzi schemes, but they don't typically fool sophisticated investors. These last 30 years have seen the markets grow increasingly deranged. In that sense, Bernie Madoff was the true visionary who set the tone for this era, much more so than Elon Musk or Adam Neumann.
> I tried, in the previous section, to capture the horrors of FTX’s balance sheet as it spiraled into bankruptcy. But, as I said, there is something important missing in that account. What’s missing is the money. What’s missing is that FTX had at some point something like $16 billion of customer money, but most of its assets turned out to be tokens that it made up. It did not pay $16 billion for those tokens, or even $1 billion, probably. 7 Money came in, but then when customers came to FTX and pried open the doors of the safe, all they found were cobwebs and Serum. Where did the money go?
> If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison.
I had this full quote on my clipboard. It's a masterpiece. 3 Cuil (‽).
> FTX worked fine: People liked its technology, and it seems to have made money. The problem was in its balance sheet, which was full of snakes, and its governance, which put all the snakes there.
The big question: Where did the somewhere between US$4 billion and $16 billion that went to Alameda Research go? It seems that FTX transferred most of their assets to Alameda Research, which either lost, stole, or hid them. Has Caroline Ellison, the CEO, been questioned yet?
Before someone tries to Hanlon's razor this, these guys were not stupid, they can pretend to be but they come from very competitive backgrounds, they knew what was going on.
FYI, don’t give them too much credit. There looks like so much evidence here they could be in jail for most of their remaining lives. That’s pretty dumb.
I remember getting those once a couple of months ago. It was so indescribably disappointing. I had never heard of FTX before that because I don't care about crypto-BS, but I feel like everything happening to FTX lately is a suitable punishment for inflicting those on the world and so I'm just sitting here with the metaphorical popcorn.
I really disliked those. I had this fun routine where I would let my dogs pick a fortune cookie and then read the fortune to him or her before giving the cookie to the dog as a treat. One time Sky got, "you will live a long life and eat many cookies." I about cried.
These, blegh took all the fun out of it and I just stopped getting Chinese take-out.
I missed that line while skimming the article, but that is exactly what was going through my mind.
It is mind-boggling how this can exist on such a grand scale without any scrutiny.
These people are in the business of market commentary, not market predictions. That said, Levine has been very critical of crypto (and very entertaining about it) for a long time now.
How about (much) earlier this year? Matt Levine, in a podcast with SBF:
> Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.
There's that famous quote about the tide going out and seeing who isn't actually wearing swim suits. I think a similar thing applies to all the financial chicanery that has been in play in this 0% interest rate environment. In reality, while the financial system is irreducibly complicated in some important ways, there's also an important sense in which the entire thing is really built on just some simple primitives. Basically, the financial system can move risk spatially and temporally, and charge a fee for the activity. That's really all it can do. I think from the proper point of view it can't really even do that primitive without at least some net increase in risk, though I admit defending that mathematically would be a challenge. (For now we could just start with the proposition that if there was an easy way to simply reduce overall risk, it would have already been taken, so all in all there can't be very many such things just lying around. And they've been building a lot of things on this primitive, so it's not a hard guess that there's a lot more use of the primitive than there could possibly be opportunities for such uses to result in true net reduction in risk, whatever exactly that may mean... I know I'm handwaving here.)
If you think about it mathematically, it's important to understand that no amount of concatenation of the primitive of "moving around risk" can do anything more than that. And, in particular, no amount of concatenation of things that leave net risk either the same or somewhat greater can ever end up reducing the amount of risk in the system.
However, each such composed operation introduces a place for someone to misprice the risk, especially as the risk is communicated across lossy channels, let alone channels with a certain amount of incentive to misrepresent the risk to the buyers on the other end. So while no amount of combination of those primitives can ever reduce risk overall, it sure is full of opportunities to convince people the risk has been reduced, and for them to take various actions based on that. Combine that with one of the most popular operations being to take a nice risk gradient that gradually ramps up from "high probability of small bad event" to "low probability of big bad event" and shoving all the risk into "super low probability of total utter unrecoverable catastrophe", and the whole thing is just destined to explode hopelessly.
And yet... perhaps some readers are saying well, duh, jerf, how else could it be, I would say to you I'm firmly middle aged now, but those castles based on financial engineering have been floating in the sky my entire adult life now, even counting the so-called "crises" I've seen. And to the naked eye, those castles have gotten bigger, higher, nicer, and more numerous the entire time. It takes... something... some pretty big cajones to stare up at those things that have been floating in the sky for so long and saying "they can't possibly do that forever". Especially when you may well have bankrupted yourself seven times over trying to trade on that presumption, even if it is in fact true in some abstract sense.
The financial system is rapidly simplifying. It's going to be a painful process for quite a lot of people. A lot of people who think they are on solid ground are going to discover they've been herded onto the flying castles without realizing it. It will, if nothing else, be very educational I suppose.
I wonder if there was anyone who knew this and knew enough to force knowledge on everyone. Binance's FTT-USDT linear perp would have minted if you knew and could advertise that to the world. And considering the amount you could have minted, you could have backed account hard with hella USDT. For that kind of information, no way you're getting it for free.
You're going to get that as late as possible after someone has sold hella FTT-USDT perps and stood enough USDT there to survive funding fee for a few weeks.
Marc Cohodes has been sounding the alarm about FTX for a while. Here's a snippet (from last month, before the FTX crash) where he calls out the shady background of said compliance officer:
I happened to catch the Odd Lots podcast episode where Matt Levine and SBF of FTX were co-guests soon after it first came out [1]. Matt's reactions were priceless. Well worth the listen now, considering FTX blowup
He appears to me to be a financial geek, interested in the mechanics of finance for its own sake, and who finds comedy (often dark comedy) in the mechanics of our financial systems.
Philosophically, we can’t be 100% sure of his motivations to publish his insights, but everything of his that I have read points to the reason primarily being that he finds it fascinating, a nearly purposeless academic joy.
The point about being an entertainer is a good one. Nonetheless, after reading that I came out with more respect for Levine. With FTX in shambles, it would've been easy to go with the flow and lean into how he predicted the whole thing with his Ponzi question, but Levine instead honestly comes out and says that he actually liked SBF more after that interview.
I really don't think anyone was confused about yield farming being a Ponzi. Everyone who was in it just thought they'd get out before it blew up. Not really related to FTX blowing up.
This distinction keeps getting lost in all this. Exchanges like Celsius and Voyager were pretty explicit about the fact that they were taking your crypto and lending it out to people to generate yield. Anyone with a brain should have realized that involved some risk of losing your assets, especially when you compare their rates to what was available elsewhere at the time. Those exchanges blowing up because of bad loans was entirely foreseeable and not surprising.
But that's not why FTX blew up. They went down seemingly due to straight up fraud and/or theft. FTX users had no indication that FTX was doing anything other than holding their assets and collecting transaction fees. They're completely different situations.
One theory is that the crypto quant funds figured out how to exploit the Alameda FTX market maker starting in 2020-2021 to take tons of money from Alameda. But FTX couldn't just turn off the Alameda market maker because most of the FTX trading volume, and therefore FTX revenue, was these crypto quant funds taking money from Alameda. So if they turned off the Alameda money spigot then their revenue would drop off a cliff and they wouldn't be able to raise more money from Sequoia or the UAE. And the value of FTT was tied to the trading volume and was a huge portion of their assets, so if volume fell they would be insolvent.
Basically they turned customer deposits into revenue at pennies on the dollar.
This doesn't make much sense to me. I think the problem is that arbitrage just dried up (as it does in a maturing market), and SBF got high on his own farts and started making directional bets. This is clear from the amount of FTT tokens that were held by Alameda in comparison to the amount of assets a typical market maker would hold relative to a pair's liquidity.
This is what likely happened!! These group of inexperienced guys thought they had found a better way to market make, they even had a blog explaining their better strategy.
But 5 minutes of reading it immediately becomes obvious that it can easily be exploited and leave alameda holding the bags.
You can't be the exchange, the person loaning out huge margins, and the person backing up the entire system, all in one. Too many conflicts of interests, that leads to making suboptimal decisions. One part of you has to keep the process propped up, so that the value of margin loans you gave out don't fall, which means eating up a lot of lot of losses from the people you gave margin loans too. And you can't stop eating up the losses, or the whole thing collapses.
This was always going to fail. The only play they had was to keep the crypto hype going so that something other than them will drive the prices up and they can exit all the losses they took on from market making quietly. And that was the play they were going for. Hence all the SBP hype, the superbowl ads, the naming of sports arena. Excess crypto hype was their only play. And that's all they did the last few months. Find ways to get publicity for crypto, SBF etc
Yep, SBF was 6th on the list of largest 2022 donors by donating exclusively to Democrats. Guess who's 14th on that same list donating exclusively to Republicans:
"Its balance sheet consisted mostly of stuff it made up! Stuff it made up! You can’t do that! That’s not how balance sheets work! That’s not how anything works!"
I'm picturing Matt Levine being carted away by nice men in white coats after finishing this paragraph
I made a comment elsewhere about the balance sheet. When I looked at it, it indeed looked like something Sam Bankman-Fried just typed into Excel on the weekend of their emergency meeting.
How in the world is a balance sheet not a report that is generated by a system, viewable by any executive? Did they not have a CFO or any finance people or accountants?
> Did they not have a CFO or any finance people or accountants?
Perhaps not?
"If you take a look at the about FTX page, it shows six senior team members: the CEO, the COO, two leaders on tech and two on compliance and legal. Something is missing. For a company managing billions of client funds, $16 billion according to the Wall Street Journal (WSJ), is it not odd that there is no Chief Financial Officer (CFO)?"
> How in the world is a balance sheet not a report that is generated by a system, viewable by any executive? Did they not have a CFO or any finance people or accountants?
Depending on your line of business, this is actually not a simple thing when you're trying to mark assets to market in a meaningful way. When everything you own is liquid, it's one thing. When things are less liquid, it's another. This is true even of completely legitimate businesses.
But isn’t that basically the line of business of an exchange and a trading firm, supposedly one specializing in arbitrage? And despite its difficulty, which I can understand, it still seems like something that should be a bit more automated than the CEO typing them into a spreadsheet a week before the company collapses and warning readers of the “obvious” chance of typos.
I’m not surprised by spreadsheets at all. They’re extremely powerful, and I know they’re used heavily. But this was clearly a document just basically made up by the CEO on the spot.
Excel and Google Sheets can both be connected to data via APIs. Click a little refresh button and it'll pull in the latest data, run the formulas, and update all the sums and charts. This stuff goes back to the 1990s, and I've seen non-tech-literate secretaries set it up. It can be as simple as dumping CSV files to a file share and just loading that into a worksheet or two.
The fact that a company managing billions of dollars couldn't even do this much is very, very telling.
I was thinking about this. A chartiable explaination would be that individual companies in the group have proper balance sheets but there was no nice collation of just the material assets of the whole group.
For many businesses, such a thing isn’t really possible anyway (without manually maintaining a bunch of excel sheets for instance). A lot of large important things are done by a couple of folks poking and prodding and spreadsheets, then making decisions.
Now, I'm not a money scientist or anything, but I really feel as if Sam Bankman-Fried could have picked up a book or two on accounting or how to manage a balance sheet before proclaiming himself a money genius.
“I’m very skeptical of books. I don’t want to say no book is ever worth reading, but I actually do believe something pretty close to that,” explains SBF. “I think, if you wrote a book, you fucked up, and it should have been a six-paragraph blog post.”
As someone that has probably read less than 10 fictional books in their life, I can see where he’s coming from.
Like, I’m literate and basically read stuff all day. And I can get through a textbook as a part of a course, but force me to read a novel and by page 7 I’m falling asleep and losing track of the characters.
I’m on the fence about borrowing/buying a book that was based on a podcast series because I fear 90% of what it covered was in the podcast.
Yes. Yes. That's the joke here. That the guy who decried traditional forms of communicating information and styled himself as some sort of nu-genius philanthropist was hoisted by his own petard. That if he had even a fraction of the intelligence he thought he had he would have realized that he didn't have nearly the knowledge needed to do what he claimed he would do.
His books are a mess because he had no idea of how to organize them.
It is incredible that each time I read new article on FTX I think "well, that tops everything I've seen so far in supposedly legit financial companies" and each next day I learn something that totally leaves the previous one in the dust. Turns out they didn't just used customers' money for risky investment as I thought, they actually pretended that illiquid token they themselves invented is a good asset to cover liabilities for customers' money! And they actually sent balance sheet with this to the investors trying to entice them to invest in this. No wonder Binance run away at the first look of it.
Look up the balance sheets of Tether, Bitfinex and Binance. Their reserves are held in various dodgy instruments and they don't want you to know what those are ('commercial paper', point in time attestations instead of audits etc), instead they come up with fanciful schemes like this to distract from the essential facts of where the money resides:
Yes I agree from what I’ve seen they are the most stable, though it’s hard to know what is going on under the hood and the ceo is an unsavoury character who I wouldn’t trust with my money.
Echoing this question.
I worked in smallcap investment banking for several years. My bank wouldn't speak to you if you didn't have 2-3 years of Audited financials (note: not 'Reviewed' or a 'Compilation'). Often we would request an additional audit if we didn't recognize the firm that did the prior auditing.
All for a valuation range of $200MM - $500MM.
Meanwhile a hastily compiled excel sheet seems to satisfy the largest VC's in the market? Billion dollar valuations based on totally unsubstantiated numbers?
Audit's are expensive (like $30-$80k). But surely better than losing $200MM on hot air.
It's worse than that. That spreadsheet was created after FTX became insolvent. When Sequoia invested, they probably didn't even have something as good as that terrible spreadsheet.
Or more charitably, Sequoia presented with something more professional looking, but completely incorrect.
Famously, SBF was playing League of Legends while pitching to Sequoia, and they just about fell over themselves in aww at his quirky genius. Matt even quotes this bit in the article.
The piece Sequoia had on their website about SBF, which they have since removed, described a meeting they had with SBF, and at the end of the meeting they walked over to him and found him playing League of Legends on his laptop. For some reason, this made them think even more highly of him.
> What Sequoia was reacting to was the scale of SBF’s vision. It wasn’t a story about how we might use fintech in the future, or crypto, or a new kind of bank. It was a vision about the future of money itself—with a total addressable market of every person on the entire planet.
> “I sit ten feet from him, and I walked over, thinking, Oh, shit, that was really good,” remembers Arora. “And it turns out that that fucker was playing League of Legends through the entire meeting.”
> “We were incredibly impressed,” Bailhe says. “It was one of those your-hair-is-blown-back type of meetings.”
Sequoia may have gotten FTT or SRM tokens issued to them as part of their investment. If they did, they could have sold them to bag holders. In theory they could have known that they would profit from their investment even if the company went to zero, making due diligence optional.
I have no idea if anything like this happened. But if it did I don't think anyone has to report it. And I don't think it would be illegal. (But I think it should be illegal.)
> $16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT? Never mind the valuation of the beans; where did the money go?
Exactly. This is the first time I've seen the media asking the right questions.
The answer probably is in part that most of it never existed to begin with-- those 'customer' liabilities probably include the probably fictional billions in arb gains SBF claimed to have and some amount of magic beans deposited by related entities.
E.g. Deposit $1 billion magic beancoins you essentially made up (or a friend made up), then trade them for "Bitcoin perpetuals" (levered paper bitcoins) with FTX itself acting as the counterparty. Now the 'customer' is owed $1bn in bitcoin on FTX's books and ftx is long a billion in magic beans.
Then get your friends in the media to write glowing stories about FTX's meteoric rise and some suckers come in, deposit real bitcoin, invest money from real pension funds, etc. and the 'customer' can then withdraw some of their paper bitcoins. ... at least until the exchange runs out of anything except magic beans and someone forgets to set the switch to 'more magic'.
> FTX worked fine: People liked its technology, and it seems to have made money.
Well, the people who deposited there liked the 8% APY they gave people simply for depositing funds. Prudent people saw that obvious ponzi scheme marker and stayed the hell away!
I think you’re confused about what a liability is. If the liabilities were fake FTX would not be insolvent. Their problem is that their liabilities are real but their assets are fake.
You might want to consider adopting a less condescending communication style in accordance with HN policy-- it would make it easier for both of us to learn something.
I think I adequately described a credible sequence of operations, but your dismissive reply has made it impossible for me to tell which parts weren't communicated effectively.
The central unanswered question is "where did the real money go?": Those ftx related magic beans were constructed for ~free. The balance sheet makes it look like billions of Bitcoin are owed, so where did they go?
The idea that FTX didn't pay for the magic beans is just an assumption, but it's not necessary. They could have paid a related entity for them using the paper bitcoin traded on the site.
I'm suggesting that related entities such as Alameda research and SBF personally deposited magic means and traded them for Bitcoin "perpetuals", with FTX awarding them paper Bitcoins. This creates a bitcoin liability on FTX's balance sheets even though no billions of dollars ever existed.
Some amount of actual valuable assets were deposited, then withdrawn by people who traded magic beans for FTX bitcoin liability (and/or were awarded bitcoin through FTX's 8%/yr yield program on customer deposits) -- leaving FTX with a balance sheet full of huge Bitcoin liabilities.
In that scenario one could go back through the transaction records and unwind some of these magic bean trades and make FTX less insolvent, but they'd still be insolvent because of the real assets that were withdrawn by parties that only brought magic beans into the picture, as well as FTX's spending, donations, bills for their designer amphetamines and cleanup services for their orgies, and other "business expenses" typical of their industry.
Isn't it obvious? It was paid to customers and others that took the money or equivalent dollar amount in assets off the exchange. Either to a bank, another exchange, on-chain self-custody, political donations, salaries, stadium naming rights, Sam's "make it all back" scheme, etc.
Matt is smart, so maybe he knows, and the question is rhetorical.
It's not rhetorical: The known donations, naming rights, etc. don't remotely add up to the amount of liabilities.
If their balance sheet was full of some external asset that had lost a ton of value you could say, okay customer deposited Bitcoin and FTX used it to buy whatevercoin and whatever coin lost 96% of its value. The money went to the people selling whatevercoin.
But in this case it's a mystery-- their balance sheet is full of magic beans but most of them are magic beans ftx and crew appear to have printed from nothing, not magic beans they would have had to buy on the market.
So customers deposited real money, a bit was spent on donations/etc. And FTX created some magic beans-- so where did the money go?
And my conjecture was just that a big chunk of the liabilities are also fake too-- the result of magic beans being deposited by 'customers' (really FTX insiders) and traded for paper bitcoin ('perpetuals').
Customers deposited $8B you mark $8B of cash as assets and $8B of customer claims as liabilities.
You send that cash to Alameda *off the books* because otherwise you will raise some alarms in internal procedures. Now your assets and liabilities don’t match anymore.
You want to do some accounting because you are about to go bankrupt, you now end up with a $8B hole that you mark as “Hidden poorly internally labeled account”
I believe that balance sheet supposedly contains Alameda assets too, but I'm not sure there. If so there is still an interesting question of what Alameda Research did with the funds -- as the reports of their assets had them mostly holding stuff FTX related companies printed.
Forgive the repetition (I've mentioned this on other threads about FTX and their balance sheets) but this doesn't seem to be widely reported or known for some reason:
1. FTX had no CFO [1]; and
2. Their accounting firm is on the Metaverse [2].
(1) is particularly shocking because its normally the CFO's experience and reputation that gives investors and customers confidence in published numbers (yes, there's that awkward trust element against that seems to be an anathema to Crypto Andys). Even if it's not a regulatory requirement, I"m honestly shocked that the investors (Sequoia, etc) didn't insist on an adult in the room so they could trust the financials.
Horrible for the customers. No sympathy for the investors. A giant fail by the financial press for not highlighting this issue earlier as it's a definite red flag.
It's even funnier and crazier than "Silicon Valley". I mean, c'mon - the auditor was the first Metaverse financial auditing company?! It's just so amazing and hilarious.
> So if for instance some company creates a token, and says that there can be 10 billion of the token, and reserves them all for itself, and then sells 1 million of them to outside investors for $1 each, then the market cap of that token is $1 million ($1 times 1 million circulating tokens), while the fully diluted market cap is $10 billion ($1 times 10 billion total tokens), and the issuer’s 9,999,000,000 remaining tokens have a value, on this math, of $9.999 billion.
I have had for a while this secret plan to become the richest person in the world by a wide margin. Because I seem to be too lazy to actually execute it, I think it is better to just publish it for the hope that someone else does it:
So, the plan is to create a new cryptocurrency called Googolcoin (GGC). The supply of the coin would be - as the name implies, 10^100 GGC. I would pre-mine all but say 1000 of them for myself and leave the rest for miners. Then I would start making the market and put all of my GGC for sale, at a price of $1/GGC. Of course, I would also put offer to buy as many GGC as anyone wants to sell at say $0.7/GGC. Then I would go and bribe someone and buy one GGC from me. And there you have it. My net worth would be orders of magnitude greater than all other wealth in the earth combined! Take that, Elon.
(If my reader at this point has not realized that the concept of market cap for cryptocurrencies is stupidest thing since... well previous stupidest thing, I would recommend selling your crypto ASAP.)
That youngsters in a new, unregulated and often scammy industry could do this, is not at all surprising. That lots of old people with billions of dollars gave them money to lose, is what needs explaining here.
Explanation: Greed, FOMO, and a lack of better opportunities. From that Sequoia profile I guess they were also just so enchanted by some global arbitrage trade SBF did, exploiting arbitrage being every banker's fantasy scenario.
> And another big asset is $616 million worth of the MAPS token ($865 million “before last week”). MAPS is the token of Maps.me 2.0, a sort of Serum spinoff that was also launched by FTX;
I remember when maps.me added crypto and many users fled to Organic Maps. I didn't know that FTX was behind it.
Wow, imagine having 8 billion of customer money, negative, at a badly labelled internal account. And now remember that Wirecard fell over made up assets of 2 billion.
> FTX shot its customer money into some still-unexplained reaches of the astral plane and was like “well we do have $5 billion of this Serum token we made up, that’s something?” No it isn’t!
The upcoming series of FTX articles will be better than the Elon saga I think.
Now people are realizing that the scam was planned from the beginning. Serum started trading in 2020 and was in preparation before that. And SBF was part of it from the beginning.
Compliance lawyer was previously involved in massive online poker scams. Guess who's that lawyer' ex-colleague lawyer, also involved in the scam, is working for? tether/iFinex/BitFinex.
Go read @bitfinex'ed 's Twitter account. He's been exposing tether / iFinex / Bitfinex / Alameda / FTX and SBF as frauds since the very beginning.
>Go read @bitfinex'ed 's Twitter account. He's been exposing tether / iFinex / Bitfinex / Alameda / FTX and SBF as frauds since the very beginning.
Seems like the account trashes mainly Tether/Bitfinex, but also whatever other crypto company shows up in the news (eg. FTX, Binance, or coinbase). If you trash everything, of course you're going to turn out to be the guy who was right "since the very beginning". It doesn't mean that you're actually a good source or anything.
For instance, I scrolled all the way to the bottom (to escape all the recent FTX tweets), and found a retweet[1] portraying FTX as some sort of predatory lender and how "SBF HAS ACTUALLY RISKED LITTLE OR NOTHING", which we now know is the opposite of what happened (matt levine says that the probably lost money bailing all those companies out).
Isn't that the problem? If you call everything a fraud, is it worth listening to you? Presumably in this case "fraud" refers to some specific instance of intentional deception, and not just some vague idea of "it's fraud because crypto is fraud, because crypto has no value" or whatever.
They are frauds because they lack proper accounting controls, store money in assets they themselves control, move money between shell companies for ‘attestations’ and pretend it’s an audit, refuse to get proper audits and because some of the people running them have a history of fraud.
>But he was right. Do you really think tether/iFinex/Bitfinex/Deltec are nice persons playing it fair?
Whether he's "right" or "tether/iFinex/Bitfinex/Deltec are nice persons playing it fair" is besides the point. I even plainly admit that he was right in my original comment. My point is that the tweets coming out of the account has zero signal because he calls everything a scam, in the same way a permabear analyst is always predicting a recession in 6 months.
"Joe Biden won the 2020 United States Presidential election: TRUMPLOSE is redeemable for $1.00! All TRUMPLOSE balances on FTX will be auto-redeemed for $1.00 at 11/15/2020, 9:00:00 AM."
How can TRUMPLOSE assets still be on their balance sheet? (Aside from "we have no idea what we're doing...")
TRUMPLOSE is the 2020 one, so your point stands that there is no explanation for that account still having a huge amount of money. That said, we now know that internal labelling of accounts was not FTX's forte, so...
I think the idea of "fully diluted market cap" is essentially bs. It is answering the question what if the supply went up but the demand went up to the same degree as to keep the price stable, what would the market cap be then?
Yeah, exactly. I reckon they didn't lose it. That money was sent somewhere else and they "covered" it up with their own issued/invented tokens at ridiculous real cost. It would seem plausible to think that they used Alameda as a proxy for the real destination of all that money.
The recent crypto downturn has been unrelenting and deep: It's totally plausible they just thought they were the kind of geniuses who could spot the bottom of the market and quickly bled through all the money
but yeah, it's also possible the money just ended up at a third unknown entity
Thats likely what happened. They are their own margin lenders and also FTX market makers. They backstop rapidly falling tokens on their exchange. So a sudden but prolonged drop in crypto prices can wipe put huge amounts quickly
His fuck buddy allegedly claims SBF's company forked over the cash to cover bad debts. I'm guessing we're talking $Bs.
"Around the time the crypto market crashed this spring, Ms. Ellison explained, lenders moved to recall those loans, the person familiar with the meeting said. But the funds that Alameda had spent were no longer easily available, so the company used FTX customer funds to make the payments. Besides her and Mr. Bankman-Fried, she said, two other people knew about the arrangement: Mr. Singh and Mr. Wang."
That's allegedly hell of a lot of money to lose over a shared woman who didn't even pop out your kid. Honestly dude probably could have made out and at least not gone to jail if he hadn't been allegedly defrauding his customers to prop up his amour's company.
Almeda was also the market-maker backstopping FTX. They were using Alameda to provide backstop liquidity to FTX, i.e. absorb losses when prices went backwards quickly. Unfortunately, they were also loaning out huge margins, which means people on their platforms could rack up losses pretty quickly.
There he is a blog authored by SBF himself from like 2018 where he was touting their innovative market superior market-making approach, which ultimately boils down, they had automated circuit-breakers, and if the worst came to the worst, some robust 3rd-party entity will come in absorb the losses. He never explained why anyone would want to do that. (I wish I can find that article where he explained it). He probably was using Alameda as that 3rd-party entity to absorb the losses. And since they were also recklessly handing out margin loans for people to trade with, those losses can get really large really quickly if crypto prices went down and stayed down. If they rebounded, they will make a killing. Which is why hyping crypto and SBF so prices rebound is their only play.
yes, I am sure there was some frivolous spend there. But my strongest hunch is that majority of the funds Alameda lost was from backstopping FTX when prices went south. He thought he was too smart. he basically reinvented the wheel. he reinvented the entire financial system with himself and his company playing the role of the Feds, larger bank, smaller bank, and retail bank, stock market exchange all in one. The FED has the economic and political and military might backing him. Alameda has funds deposited by users, and some guy who thinks he is too smart.
I don't know much about Austrian economics, but the wiki article about its "malinvestment" concept [1] sounds like it's talking about us:
> In Austrian business cycle theory, malinvestments are badly allocated business investments due to artificially low cost of credit and an unsustainable increase in money supply. Central banks are often blamed for causing malinvestments, such as the dot-com bubble and the United States housing bubble. Austrian economists such as the Swedish central bank's Nobel Memorial Prize in Economic Sciences laureate F. A. Hayek advocate the idea that malinvestment occurs due to the combination of fractional reserve banking and artificially low interest rates misleading relative price signals which eventually necessitate a corrective contraction – a boom followed by a bust.
Recommendation: If you've been following or interested in the FTX scandal at all, read this whole brilliant post beginning to end. Not only is the writing in Matt Levine's hilarious style (I second all the other comments related to this!) it is also incredibly informative as to the mechanics of all the WTFs that actually went down. For example, I've been following this fairly closely but I didn't really have a good understanding of how Serum/SRM played a role, and Levine outlines this clearly.
I would say Levine's proposed scenarios for how the money was stolen are generous... he comes up with all sorts of scenarios that make SBF and friends not sound like what they actually are - fraudsters.
Really?? That's not the impression I got at all. Statements like "The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison" doesn't exactly sound like he's being generous to SBF.
Time and time again it seems like the people involved in the crypto industry are speedrunning through dynamics that are now either clearly understood as a failing strategy, or outright illegal. Another such example here.
> It’s an Excel file full of the howling of ghosts and the shrieking of tortured souls.
I wish I had Matt Levine's eloquence to put this madness into words. Great analysis and I just want to add a small thing: while a balance sheet looks like a simple listing of assets and liabilities, that's not how you go about constructing one. Your financial statements are the result of a sequence of double-entry bookeeping statements, and the balance sheet is one particular view on the data processed by this formalism. There is no way assets couldn't add up to liability plus equity, no matter the market fluctuations, valuation uncertainty,... (your numbers might be out of date/incorrect, but they would still be internally consistent). The resulting checksum mechanism is an interesting aspect why double-entry bookeeping was such a useful tool for merchants on busy, dirty, buzzing medieval markets.
FTX, on the other hand, looks more like a mechanism for funnelling cash to who knows where - that's the big question that Matt correctly points out: where did all the money go? There's no way you can spend $16bn on meth and yachts and mansions in the Bahamas in the space of a few years.
Maybe, but it might be worth following the money a bit further (especially on the later transactions). Was the money at Alameda really just lost on bad trades, or which accounts did it end up in eventually?
I read somewhere else that the portfolio of Alameda contained over 400 companies that looked like little more than a Twitter profile with a handful of followers. It's not hard to imagine that the people behind those 'firms' were the same or related to those who are now saying 'whoopsies, they looked like such good trades back then, my bad'.
I think it's less bad trades and more like a few frivolous purchases and a lot of losses from using alameda to market make on FTX, i.e. when crypto prices fell, they were using alameda to bail out margin loans they had made out
The vast majority of FTX Trading’s recorded assets are either illiquid venture capital investments [...] In all, the spreadsheet says FTX Trading’s assets were [...] $3.2bn of illiquid private equity investments.
Sounds like the VCs may have managed to recoup their investments using customer funds before the thing blew up.
Maybe I misunderstood, but if the investments were on the "assets" side, doesn't that mean that FTX was the VC investor here - and the "asset" is the potential of the investment to pay off?
How are SBF and CE not in custody at the moment? $10B of customer funds are flat out missing (assuming you start with $16B, $5B gets invested in illiquid VC and PE stuff, and $1B is used to buy shitcoins). Last I heard SBF was questioned in the Bahamas but it didn't sound like they were holding him and CE was "in Hong Kong trying to get to Dubai".
Most financial companies have large balance sheets, a small amount of equity that is highly leveraged, and asset values based on many assumptions. If the assumptions change, a business can go from everything is great to insolvent really fast. That is why such businesses are highly regulated. With crypto we see why this regulation is so important.
Matt Levine (article's author) did an interview with SBF about 6 months ago and there were plenty of red flags back then (mentioned in article in section about yield farming):
Never subscribe to his newsletter, it's impossible to unsubscribe when you want to. Literally have to filter it in my mail to go to the trash as for the Bloomberg website won't let me unsubscribe.
He wrote a whole issue of Bloomberg Businessweek boosting crypto recently that was not up to his usual standard and was worse than the usual Businessweek standards of layout and typography.
It seemed something a year out of sync, aimed to get ‘greater fools’ to take a second look at crypto, completely divorced from the headlines a week ago and a week hence.
It's not news. Anybody who doesn't know how Bitcoin works in 2022 is never going to understand how Bitcoin works and they need clear messaging such as "No" or "Nothing more to see here, move on folks." My guess is that the real audience is blockchain enthusiasts who crave validation and will squee on it so much that they'll buy 50 reprints.
Why doesn't Bloomberg take an issue and reprint the first few chapters of Extraordinary Popular Delusions and add a paragraph about each of the 20 times that people said "it's different this time" and it wasn't? That wouldn't be news but it would be timeless wisdom that would serve readers well.
Ummmm. I think for the typical readership of Bloomberg - guys in their 50s looking for cool places to park some extra cash - a five page explainer on how smart contracts work with some editorializing about how they will probably never work as promised is kind of the perfect inoculation against hype.
If people are curious about crypto, and their only sources of information are polemic, that seems much, much worse for everyone.
I just finished reading this article and I absolutely loved it. The layout with meme pictures was an excellent use of that format, especially in context of all this crypto non-ponzi-sense. Another friend of mine who doesn't know Matt was very complimentary of it (in fact he gave me the paper article). My wife is reading it now and enjoying it too!
If you felt that way about that issue, never ever look up the other single-topic issue they put out a decade or so ago about code and programming. The design of that one would probably make your head explode.
i liked how max painted sbf and co as perverse robin hoods, except they (maybe, probably) stole a bit from the commons while stealing from the rich and giving back to the commons (via political influence)
Is it wrong that I want the crypto and NFT and GME and other insane bullshit to continue just so we are blessed with more of Matt Levine!s writing? Damn that guy is talented.
So HN please go invent more multi-billion-dollar insanity that is too crazy to even be called a scam, because the world needs more of this great writing.
> Still it is striking that the balance sheet that FTX circulated to potential rescuers consisted mostly of stuff it made up. Its balance sheet consisted mostly of stuff it made up! Stuff it made up! You can’t do that! That’s not how balance sheets work! That’s not how anything works!
This is absolute gold.
Also...
> FTX/Alameda were funneling customer money into effective altruism. Bankman-Fried seems to have generously funded a lot of effective altruism charities, artificial-intelligence and pandemic research, Democratic political candidates, etc.
This is just catnip to the "right-wing" media machine, Even worse is that it's not even really that far-fetched of a theory. Billions spent influencing elections and policy over the last 3 years, and a $10B hole of customer funds just missing. This is just reinforcing the worst conspiracy theories out there, and I'm sad to see it..
> Even worse is that it's not even really that far-fetched
Partizan politics aside... SBF's very mom was running a fundraising campaign. And after George Soros SBF was the biggest donor.
SBF had already siphoned $95m out of Canadian teachers pension funds.
> This is just reinforcing the worst conspiracy theories out there
At this point it's not just conspiracy theories anymore. BlockFi had already reached an agreement with the SEC (and SBF "bought" BlockFi when it was in trouble) and it's totally obvious that FTX would have been a licensed regulated exchanges once the current bill would have passed.
It's an undisputable fact that the chief FTX lobbyist was an ex-CFTC commissioner. He apparently also was an ex- colleague of the SEC's chair, Gary Gensler.
And as weird coincidence would have it: Gary Gensler was an ex-colleague of Alameda's 28 years CEO's father.
And you dare to say it's "re-inforcing conspiracy theories"?
Let the scum of this earth be exposed for what it is.
I'm not defending people because they happen to be leeches close to the political party I'm voting for.
I should have been more clear - this isn't a conspiracy theory. The money disappeared and there were huge donations to left-wing causes. It's fraud propping up political spending. No defence and not defending them. It boils my blood.
The conspiracy theories I was referring too are the"jewish space lazers, George Soros Jewish Cabal Running The World Drinking Babies Blood" type anti-semetic conspiracies spouted off by people like Kanye and other far-right conspiracy nuts.
This gives them ammo and confirmation bias that the more nutty and harmful theories have legs, and that can have real-world, extremely dangerous outcomes.
Which left-wing political causes were championed by the ~40 million he gave to the Republican party?
Without digging into the minutia, it seems like a classic example of 'pay both sides so that no matter who wins, we get a seat at the table.' Unsurprisingly, the incumbents got paid more.
The causes don't seem to matter, pay to play does.
Now, if the right is ready to embrace an end to corporations and millionaires donating to political campaigns, it's a fantastic idea that we should embrace. If, of course, it's just sour grapes and complaining after losing a midterm senate election after putting forward a slate of some of the worst candidates they could field, I don't have a minute of time for it.
Given the historic track record on campaign financing, I think it's the latter.
Unfortunately, there is a history of this exact type of scam among firms very, very closely associated with the Democratic party.
The owner of this firm probably had more pull with the higher-ups than SBF will ultimately have - he got no jail time & a 5 million dollar fine. He's already back to running hedge funds.
Why is a coal billionaire spending money on campaign contributions normal, but a finance billionare doing the same catnip for the worst right-wing conspiracy theories? [1]
For someone who just arrived on Earth from another planet, modern campaign financing rules are indistinguishable from bribes, regardless of who the money goes to.
[1] I mean, aside from the obvious answer (Which is that their guys aren't the beneficiaries.)
I absolutely hate myself for replying, but in this situation you gave, SBF may have used customer's money, but an oil/coal baron uses their own money.
Even if you consider billionaires to be a disgusting stain on society, like myself, there's still a difference between stealing money to spend on stuff (political donations or Lambo's) and spending money/stocks you legally made in a horrible, earth-killing industry.
I absolutely detest greed in all it's forms, but I also don't think people should lower their morals and ethics to match the lowest of the low, as if they're Robin Hood (the character, not the company).
The parent comment was asking what the difference was, I said the difference was the theft. I guess I was wrong because I looked up the right wind conspiracies and they all seem to care only about the part to play aspects, which is definitely very ironic considering the history of right wing financing.
> to have generously funded a lot of effective altruism charities
That should have read “dubiously funneled money to his mates fake charity”
For all of this the fact that he was, even back when he wasn’t “the next big tech wizard” was funneling 50% of his salary, tax deductible, to his friends charity fund should have raised flags that this “charity” is actually that, and it should be put under scrutiny now, because it’s obviously these guys slush fund.
> generously funded... Democratic political candidates
This isn't the smoking gun that Republicans want to portray it as. A third of their political spending went to Republicans. Companies will typically donate to the incumbent party because they're the ones who actually write the laws, so it's not unusual for them to donate more to Democrats.
I worry the hand wringing about truth being revealed about rich/powerful due to concerns about "right wingers" is in some way contributing to the lack of accountability these people face
The current unsubstantiated right wing rumor is that Ukraine "invested" a bunch of the US aid money into FTX.
I think the rumor is probably conflating "actual" ($ backed) aid with the crypto donations individuals made through FTX at the beginning of the war, but who knows.
Or more likely, it's just "everybody we hate are surely connected and conspiring against us" type of thing, where everything just gets dumped into one huge pot, mixed up and served up for rage clicks. I mean, it both has words "crypto" in it, there's billions here and billions there, shake up weeple!
The people at Sequoia did not lose money. They are fine, and their investors are probably fine. The people who lost money were actual FTX users, who probably trusted FTX in part because it was so well-marketed and endorsed by so many "trustworthy" organizations like Sequoia.
What? They bought shares in a company that went to zero, they lost all the money. The only way their investment is worth anything is if every single FTX customer gets their money back because in a liquidation lenders get paid first before equity investors.
Yes, but the actual people involved, the employees of Sequoia, did not lose anything. I guess the word "lose" is ambiguous here, but I mean that they will not be personally affected by this failure.
I'm a crypto moderate, if such a thing exists. Given the vitriol that I see here re:crypto (and the fact that pretty much every thread on crypto has to get dang chiming in to remind people to be civil & adhere to guidelines), there is little chance that actual "crypto evangelists" are going to be commenting here.
Even a comment like this one will get aggressively downvoted in the current climate.
I feel like I am slowly changing my mind about cryptocoins. It always seemed so powerful. Bitcoin's exchange rate may fluctuate but it has value and is nearly indestructible. You could complain that it's overvalued but it's not at all a ponzi scheme. Unfortunately, it seems like the only utility that has arrived is for the black market. A bajillion new coins have been created, some of which also have real value and purport to improve on bitcoin. But here we are in 2022 and while I can see some cryptocoin ATMs in supermarkets, I doubt they're used for much beyond paying ransoms.
Even if we move the most important/useful coins off of proof-of-work †, I think governments around the world may move to outlaw cryptocoins. At which point whatever modest legitimate utility that existed will be eliminated and only the black market will remain.
† this seems difficult or impossible for bitcoin until/unless it forks to something that looks completely unlike bitcoin.
What is "black-market" is socially constructed and dependent on where you are resided.
Crypto has massive uses in evading capital controls in countries that have traditionally had trouble managing their own currencies, like the Turkish Lira or the Naira. In these countries, it is often illegal to hold substantial sums of dollars and not safe to hold these sums on your person.
These are "black market" uses from the perspective of the Nigerian or Turkish government, but immensely valuable to the user - and from my American perspective, probably a positive use case.
SBF was well liked by much of the Bitcoin haters because he pushed many of the same sentiments. It not for the fact that this implosion has also dragged the Bitcoin price somewhat too you would be hearing much gloating. (well, you're probably hearing gloating anyways because thats how social media works. :) ).
This has all the echos of Enron and Arthur Anderson. I know Sequoia isn't an auditing firm but the warning flags and misses on their part are so extraordinary it wouldn't surprise me to find out there's people at Sequoia who were in on it.
