FTX balance sheet, revealed | Hacker News Reader

FTX balance sheet, revealed

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238 pointsparenthesis298 comments

The "before this week" column seems to be attempting to draw sympathy by saying "but everything was fine before, seriously!" when in reality it just proved that, even in the best of worlds, they had an extremely optimistic view of the entire crypto ecosystem, including its liquidity.

I can't believe they seriously held that much of their total value in their own issued token. That's just preposterous. Imagine if JP Morgan Chase's entire value was in JP Morgan Chase stock, and they just reported that as their value in cash. It's like recursive valuation.

Remember the Wirecard collapse, where there was a fake bank account in the Phillipines that allegedly had $2.1 billion USD in it?

This is the crypto equivalent.

Garnished with a dash of Bernie Madoff.

Yes, it was actually two accounts: BDO Unibank and Bank of the Philippine Islands.

I wonder if (some of) SEC will play the same role in this story as BaFin played in Wirecard's.

The hole in Wirecard's balance sheet almost doesn't seem that bad when you see what kind of hole FTX has.

Has there been any attempt at reform of BaFin in the aftermath -- or has bureaucratic inertia absorbed all such impulses?

> Imagine if JP Morgan Chase's entire value was in JP Morgan Chase stock

The value of JP Morgan Case is the total value of their stock, almost by definition.

Buy backs are also basically a transfer of a company's cash to company stock and are regularly done by US corporates.

The difference here is that they secured debt against their own company assets so that when the value of the company went down, they went into more debt relative to their asset value.

They were also leveraging an asset which was highly volatile and which could be easily targeted by bad actors. Anyone with any experience in risk management understands that your leverage should be proportional to the volatility of the asset you're leveraging. This is why you get large loans backed assets like real estate, but not stocks. Stocks drop 20-30% every few years where as real estate is far more stable.

If they were leveraging dogecoin instead of their own token the result would have been the same.

book value. Companies don't get to count the value of stock owned by other people as assets.

> Imagine if JP Morgan Chase's entire value was in JP Morgan Chase stock, and they just reported that as their value in cash. It's like recursive valuation.

While I think real world finance is on much more stable ground than crypto, I thought it'll be funny to point out that many of the world's central banks back their liabilities (the currency they issue) with own government's bonds. Luckily, the bonds are denominated in the same currency. There is no chance of the central bank going broke, as long as they hold the bonds to maturity.

I wrote a whole post because I misread your first line as "while some people think" and set out to "tell people on the internet they are wrong", but since we seem to actually agree with another, I'll post the below as an agreeing addendum to make the point just how much more stable real economics and finance are than crypto BS. And also because I wrote it already.

---

This is not "luckily", it's by design, and there's a couple of other key differences as well.

1.Modern central banking implements an artificial separation between government and CB (an imperfect one), that attempts to make this less recursive...

2. ...but the key difference here is that the value of the dollar ultimately derives from the fact you need to pay US taxes with it. If you want to do business in the US, you need to get some USD to pay taxes in which are then used to keep the US a place to do business in. It is exactly the same model as FTT except that instead of paying "taxes" to trade on one of many market places, the US is a giant nonfungible place, with lots of difficult to move assets and people, serving a fucknormous circular economy with a staggering amount of real world consumption - i.e., a place you want to or have to do business in even if there's shock...

3. ...and has a monopoly on the violence (in the form of laws, courts, police and military) that actually enables the notions private property that enables this all. If the US government collapses your dollars are worthless whether they are backed by a bond or not.

4. Finally, neither the CB nor the government are up for sale or needs to generate profits or shareholder value. All they need to care about is continuing the system in a way that its constituents want (I'm not specifying the aggregation method, oligarchs are still constituents)

So overall, and with the fact that this is a system which has been iterated on for hundreds of years(thousands if you count legal code), yeah, it's a lot more stable

Exactly. People that say that the value of fiat money is fake, never think about taxes. You want to own a house? The government mandates that you acquire and give them a certain amount of US dollars. Even if you did every single transaction in your life with other assets, paying for stuff with gold and chickens, at the end of the day, the tax man will come for you, and the tax man only takes dollars.

I want to pay my taxes in BTC or ETH. I remain hopeful that one day I will be able to. Until then, fiat taxes it is.

I lost faith in cryptocurrency pretty early on because of the idea that it costs money to send or receive money. My ideal of a currency is it should be free of cost or almost free of cost to send or receive money.

There was another post here about a thought experiment where someone asked if I had eight billion dollars, how can I send a dollar to every person on earth? Well, right now you can't because it costs too much to send or receive money.

I don't have a solution but the fact that eth is full of "gas" people who want USD, makes me think it is no different from the Bitcoin crowd regardless of the pos switch. Or to quote the wolf of wall street, the people who own Bitcoin and Ethereum networks still take home cold hard cash. Don't fall for their BS. Bitcoin or eth doesn't pay for your mining rigs or your electricity.

Yeah I'd like everything to be free. But nothing created by people is.

Well if you want high transaction fees then it will never replace cash. Enjoy your make believe speculative asset. I want none of it.

> You want to own a house? The government mandates that you acquire and give them a certain amount of US dollars.

I have gone through many county clerk & recorder documents. I regularly see 6 and 7 figure houses change hands via recorded quit claim that says things like: 'love and other valuable consideration' or the frequent 'ten dollars'.

And I have read a lot of State law. While there is shady stuff in law such as "federal IRS lien can be recorded without a hearing nor judgment in State court", I have yet to see law which requires $ to exchange a house. Am interested in seeing a State law reference you may know of.

I realize that at the state level in the US things vary by jurisdiction, but in Canada at least you’d be hard pressed to buy property somewhere that doesn’t require annual property tax payments paid in CAD.

That's just some dummy language in the deed and not the actual transfer of value. Almost every deed is for around $1 even if the sale price says millions. In the U.S. at least it doesn't matter what you put on the deed, either way they will tax you based on the actual value of the transfer.

If my understanding is correct the Swedish central bank, Riksbanken (which happens to be the oldest in the world), has said that whey do not want to hold their QE assets to maturity and that they are essentially bankrupt. They will be bailed out by the tax payers of course.

You're probably understanding it wrong. Central banks have little or no debt, and they can "print" reserves at no cost. Reserves is the stuff they pay their debts off with. As a result it's virtually impossible for a central bank to go bankrupt.

I think your understanding is a bit off. Sure, central banks can “print” money by buying stuff. But they still have a balance sheet. If the stuff they buy falls in value and they sell it for less then they incur a loss. If they lose more money than the equity on their balance sheet then they will have negative equity. Theoretically a central bank can keep operating with negative equity, but it doesn’t look good. The Swedish central bank probably won’t. It will ask for a tax payer bailout instead.

I think my understanding of central banking is quite correct. They don't incur a loss because the money they paid those assets with came out of nowhere. If you buy a car with $1000 that you printed with your money printer, and then sell the car for $800, you're still making a profit.

No, your understanding isn't quite correct. Many western central banks hold long dated bonds on their balance sheet which they are marking down due to increasing interest rates. Different central banks are dealing with this differently. In the US they are writing IOU s that essentially mean future surpluses will be used to pay back negative equity. The UK Treasury recently wired the BoE a large sum for much the same reason. Essentially, the bonds which were profitable during decreasing interest rates and resulted in central banks paying treasuries are now moving the opposite way.

You're repeating the same nonsense. How can a bond that the central bank got for free make the central bank lose money? Please explain.

Central banks care a lot about money supply. They do not want to have to print money to account for a debt on the balance sheet, because that (eventually) devalues the currency they operate, and causes deflation which they regard as bad for the economy. They wish to use the money printer when they choose (and provide maximum effect for its valid use cases), not because they are forced. There is a money printing capacity they do not wish to exhaust. If you printed money to buy a car, but it was only because you had to make a big trip and you had actually been intending to wait for the new model, then that’s a suboptimal use of your money printer.

So basically the money printer is not free. There is an opportunity loss that they’ve found a way to measure as a real loss to make it easier.

You got it the other way around. The only reason they buy bonds to increase the money supply. So if they do buy a bond, they will pay with newly created reserves. That's the whole point. And it's impossible to lose money by purchasing an asset that it cost you nothing to buy.

The coin the central bank issues is a liability in its balance sheet. If it prints 1 trillion, uses it to buy 1 trillion worth of commercial paper and those assets lose 10%, then the bank has liabilities worth 1 trillion (outstanding currency) but only 900 billion in assets to cover them. Technically in default, but also in a very special economic position, because no body expects the central bank to ever cover its full liabilities.

Central bank reserves are not a liability because they don't entail a financial obligation. They're only listed as a liability on the balance sheet because it's convenient from an accounting perspective. When a central bank buys a bond, they use reserves, which are not a liability in a financial sense, therefore the central bank makes an instant profit. Even if the bond were to lose 80% of its value, the central bank would still make a 20% profit. Bankrupting a central bank is a lot harder than you think.

It's not just "accounting convenience" it's literally the way the profit vs loss of the central bank is defined. The central bank typically has a legal obligation to maintain stable prices, so while outstanding currency is not a liability in the conventional sense with a certain maturity date, interest etc., it's undoubtedly a debt towards society at large, which could presumably need to be redeemed and sterilized in the course of monetary policy, at least in part. Outstanding currency is a perpetual zero interest loan towards the central bank by the holders of currency.

If a central bank loses 80% of its real reserves, and financial circumstances arise where it must repurchase more than 20% of it's issued currency, for example to defend the exchange rate against a capital flight, than the bank is effectively "bankrupt" - it can no longer fulfill its legal role and regulate the value of the national currency. It's not a traditional bankruptcy, but it's a de-facto failure which many central banks experienced.

You're stretching the meaning of 'debt' and 'bankruptcy' beyond what these words are generally accepted to mean.

Since the central bank controls the unit of account value and can always devalue and print itself out of any sticky situation, the only meaningful way it can go "bankrupt" is to lose the ability to appreciate the currency. I agree it's a stretch.

The notion that the central bank can conjure pure profits out of thin air and has no liability against its issued currency is fantastical, it would suggest a perpetual profit machine. In reality, any issued currency comes with a strong liability to buy it back in inflationary times, so it's clearly an external debt from the CB's perspective, this is a well established notion.

This has origin in the pre-modern, free banking era, where competing private banks issued "bank notes" attesting their demand deposits, and which in time became widely accepted. This is basically the exact thing a central bank does, with a state granted monopoly, and no link to the gold and silver the bank "owes" for the notes.

Sorry, I can't agree that there's some unspoken promise, or even a faint expectation, that that the central bank will buy its own currency back. This is simply not true.

Buy back is implicit in the price stability mission any central bank has; it cannot be fulfilled without controlling the supply of currency in the economy, i.e (at least) limited buyback. Without that, what you get is something very much like a cryptocurrency in terms of volatility.

There is no implicit promise of buying back their own coins. This is ridiculous.

A central bank can go bankrupt - it cannot keep printing money forever.

When we look at places with hyper-inflation, at some point people lose all their "faith" in a currency (and in the central bank). People no longer want to receive a currency that can be printed at 'no cost', because this currency will only keep losing value due to constant printing. They demand other, "hard" currency, or just use barter. Of course it is illegal, but in case of hyper-inflation the fabric of the society is rapidly dissolving - those who had some savings were effectively robbed by the central bank/government, those who sold some physical good - are now "bagholding" some coin that will become worthless fast.. The spiral of inflation can become so tough that noone will accept banknotes or electronic money, since it is better to hold physical goods.

As far as I remember in places with real hyper-inflation (Zimbawbe?) the central banks introduced so many new banknotes that they couldnt even afford to print them -> the paper-mills didnt accept the banknotes, since they knew those would not be worth anything in few days.

Other example is how after people would use stacks of paper currency to buy basics like bread.

Paper currency is a very useful invention because it really facilitates trade, same can be said about credit cards - but in times of hyper-inflation often the credit cards stop working - due to no electricity. So people jump to another hard currency (e.g. in Yugoslavia or Africa they only accepted US dollars or euros and basically gave up on own currencies, even if it was illegal).

[on a side note, I bought few of those '100 trillion' Zimbabwean dollar banknotes and this was one my my best investments ever - bought them for something like 2 USD each and now they seem to be worth 150-300 USD each. The value here is that it is a 'novelty' item - that can be used as an example of hyper-inflation; all the economy 101 books show it as an example]

> Zimbabwean ... banknotes and this was one my my best investments ever

Great example of scarcity and price rising via collector demand. They are not making any more of those notes, and collectors are interested similar to collecting scarce baseball cards. Neither have intrinsic use nor utility, but they are scarce and people like to collect them.

I bought few of those "100 trillion dollar" banknotes since I find them cool and perhaps a bit to show off (I made an "in case of emergency break glass" type of thing to be hung on the wall). Those banknotes are unique - unless some other country gets even higher inflation, those will always be shown in every "economy 101" book, so they arent just a thing only for banknote collectors (whom I am not), but also a novelty item for general public (or at least economy students). It seems only the highest denominated bills skyrocketed in price, other bills are relatively cheap.

Supposedly there is a guy who bought a whole briefcase of those 100 trillion banknotes and makes a living by selling them on ebay.

True, if self-denominated debt there is no risk of bankruptcy. There is only risk of hyperinflation. That being said, default and hyperinflation are two sides of the same coin.

This is incorrect. Currency issued by a central bank is not a real liability, since its issuance does not entail a future payment obligation. It's a liability only for accounting purposes. The government bonds on a central bank's balance sheet are used to conduct (or the result of) open market operations. They aren't "backing" anything.

In USA, Treasury issues currency and coin. Private organization named Federal Reserve has special privilege to manipulate interest rates through various means.

Unlike FTX, central banks have the power to create money out of thin air, while the governments that operate them have the power to create demand for money out of thin air, through taxation.

Governments thus, control both the demand for, and the supply of money.

> governments that operate them have the power to create demand for money out of thin air, through taxation.

This is Modern Monetary Theory, but government never actually uses that power. Instead, they use "open market operations" on securities to manipulate money supply, and taxation for very roughly balancing spending.

Anything that prints its own money can be "like a central bank". If FTX had all its assets AND liabilities denominated in FTT they'd be like a strong one. But their assets are in their token and their liabilities are in real money so they're weak one. We've just seen the exchange rate of the FT-peso/USD go to nothing.

He's also being purposefully obtuse about his 2 largest regrets - the "poorly labeled" account and underestimating the size of the withdrawals.

He's still behaving as if having billions of liabilities in real money backed by funny money "assets" is somehow acceptable and everything would have been fine if it wasn't for the "last week".

But maybe it could have been?

I’m a complete crypto skeptic who would never touch anything like FTT, but it’s not an obvious Ponzi scheme. I think one of the troubles with crypto is that it’s very easy to operate what is effective a Ponzi scheme, without fully realizing it yourself.

Eh, it is _obviously_ a ponzi scheme after doing a bit of research. In this podcast he all but says it out loud.

https://jaxandmartinshow.com/sam-bankman-fried-transcript/

This quote is very interesting because he seems to try and argue for its legitimacy at the end. “Is that even wrong,” he asks. You get the impression that he believes in something like a postmodern theory of value that says, you need nothing fundamental for a thing to have value. Mass appeal is sufficient. So he looks at dogecoin and thinks, like many of us: this serves no purpose and makes no sense. He simply concludes its nonzero price is evidence against prices being real, rather than a prediction of dogecoin’s future value.

He's not wrong about value. Plenty of valuable things in society have not fundamental value. High end art and luxury brand clothing are two examples. And no, a $50m van Gogh does not have utility because you can enjoy it. Because you could enjoy a $200 reproduction just as well.

Telling that your example is the most famous example of a fraudulent market.

He was describing yield farming schemes, not FTX or FTT.

This is not a novel problem - the same situation occurs in "pre-crypto finance" with other non-stable assets like stock and currency risk; that's why we do have all kinds of frameworks on how to properly account for required reserves with the assumption that $1 B (current!) worth of such assets is not enough to cover $1B of cash liabilities.

If it has no way to wind down to zero it is a Ponzi scheme. Yes the USD and other fiat currencies are partially ponzi schemes as well but only the store of value part.

This is diluting the definition of "ponzi scheme" to the point of uselessness. State-backed central currencies emerged because people in informal economies were bartering to exchange goods and services, which is less efficient than having a standardized medium of exchange, so central authorities issued currency in order to increase the efficiency of the economy. That's not a ponzi scheme, because the value of the currency doesn't rely on some greater fool buying the currency from you.

Yes, you can use these currencies as a store of value, and therefore get utility from exchanging them with somebody in the future, but that's not where the value of the currency itself derives from (which is 1. the utility of the currency itself (people want to transact in it in personal affairs, because it's more efficient and reliable than the alternative), and 2. the authority of the state (people must transact in it in state affairs)). Call it what you will, but it's not a ponzi scheme. If you're looking for things in traditional fintech that resemble a ponzi scheme, look at something like a non-voting stock without a dividend.

I believe there isn't a lot of historical evidence that state-backed currencies emerged to deal with undesirable aspects of barter. That's pretty much just a myth people decided made sense, rather than something that happened in history.

We mostly don't know why money/currency came into existence, it happened so long ago.

There is some evidence that at least in some places it was to fund armies or generally provide more state (or pre-state ruler) control of the economy.

I don't really know what impact that has on whatever argument you're having, but anyway.

There may not be historical evidence, but first principles tell me that most people prefer cash to trading pelts for groceries every week.

"first principles tell me" is a pretty poor way of knowing what happened in actual history. In this case, it's just you wild guessing about the desires of people thousands of years ago whose lives were nothing like yours.

I mean, we don't need any kind of science or history if we could just be like "this story makes sense to me, so it must be true." I guess it's appropriate for our post-fact world.

> I mean, we don't need any kind of science or history if we could just be like "this story makes sense to me, so it must be true."

We don't have any historical record of people explicitly writing that they started using bronze tools to deal with the undesirable aspects of stone tools afaik. We just happen to know from scientific first principles that bronze tools are much more efficient than stone and we also know that societies switched from using stone to bronze. So we assume that they switched due to bronze being better. That's how the study of history has always worked.

> I guess it's appropriate for our post-fact world.

If you want to imply a conspiracy of control through currency I would say that would require more facts to back it up than the simpler alternative. Historically, we know that those in power in the past had no trouble controlling / levying tribute with simple violence.

> There may not be historical evidence, but first principles tell me that most people prefer cash to trading pelts for groceries every week.

That might be true, but your prior comment says

> State-backed central currencies emerged because people in informal economies were bartering to exchange goods and services, which is less efficient than having a standardized medium of exchange, so central authorities issued currency in order to increase the efficiency of the economy.

Which is a much stronger claim and doesn't necessarily follow from the fact that "people prefer cash to trading pelts for groceries".

If you check the wikipedia article on the history of money[1], the first forms of currency wasn't issued by the state. They were informal credit systems, or standardized unit of account (eg. grain, or receipt for grain stored at a granary and later precious metals). State backed versions of the latter came later. Even in the US, prior to the federal reserve, "currency" was IOUs for gold issued by various private banks.

[1] https://en.wikipedia.org/wiki/History_of_money

> I’m a complete crypto skeptic who would never touch anything like FTT, but it’s not an obvious Ponzi scheme. I think one of the troubles with crypto is that it’s very easy to operate what is effective a Ponzi scheme, without fully realizing it yourself.

I'm pretty certain most of us, at least in the BTC community, were mocking this yield farming as the new ICO since it's inception. The Effective Alturism, and his parent connection to Silicon Valley via Stanford make it clearer this was the typical disruptor cosplaying grifting that happens all the time: see Theranos.

> this was the typical disruptor cosplaying grifting

Being connected and well off, should now be a sign of lack of inventive mind than having one. VCs think they are risk takers but rather go for well connected SV folks unconsciously or consciously to avoid risks. I hope these two three episodes like Theranos put some sense in them.

Problem is that this is only apparent in hindsight. How do you tell apart Theranos and something like Color Labs[techcrunch]? Sometimes it isn't even clear in hindsight. From the outside, both are novel ideas. Both had talented workers working on novel ideas.

I don't know enough/anything about biochemistry so I don't know if the vision Theranos sold was even possible but how do I know that the all public all the time but only to someone physically nearby you photo sharing idea (of color) would work either?

How do you decide who to back?

[Techcrunch] https://techcrunch.com/2011/03/23/color-looks-to-reinvent-so...

Edit: another post on HN: what is "growth hacking"? https://news.ycombinator.com/item?id=33582002

As a lay person, it might be difficult. As a well funded VC, I'd expect due diligence beyond the level of 'let me see your balance sheet' before investing millions of dollars.

One particular item of fraud was the claim that their machines were on helicopters in US-led war zones. Okay, show me the contract details for this, or some kind of evidence this is actually true, and then I will verify with the counter party to ensure it's not completely bologna.

Not to mention the entire concept of 'nano-tainers' and doing blood work with a single drop of blood seemed physically improbable, and literal Nobel level scientists would need to be involved, people with decades of experience in the field, not a random college dropout.

> all public all the time but only to someone physically nearby you photo sharing idea (of color) would work either?

I can't see the appeal of that whatsoever. At least with instagram or whatever you can have followers, and then monetize those followers one way or another. On the flip side, it might be an interesting avenue for prostitutes and drug dealers to advertise their services discretely in public places.

> As a well funded VC, I'd expect due diligence beyond the level of 'let me see your balance sheet' before investing millions of dollars.

Yes. At the time it was not hard to find people who did have expertise in the relevant fields expressing skepticism. It definitely wouldn’t have been hard to kick $50k in consulting work to some postdoc to act as your advisor when the investment is orders of magnitude greater.

I don't think that Theranos had a lot of traditional VC funding. Tim Draper was the first investor and apparently neighbors with Elizabeth Holmes and pretty much the only VC I saw on the list. But he was the first investor so there may have been nothing to do due diligence on at that point. But then she got money from the DeVos family, the Waltons, Rupert Murdoch, Larry Ellison, Oppenheimers, and several other huge names.

Proof that lots of money does not necessarily make one a "sophisticated" investor. But maybe the $50m-$100m that each of those investors put in wasn't enough to be worth their time to do any due diligence.

> Being connected and well off, should now be a sign of lack of inventive mind than having one.

Or how about it is neutral?

> Or how about it is neutral?

That is never the case in the VC model; who knows you will always be more important than what you know or who you know. It's often tolerated because the king makers like Altman at YV spread the funds far enough for it to be seen as 'fair' but it's always been an insiders game if you wanted anything but a total take over for funding since capital got so concentrated in those systems.

Ponzi schemes are not obvious, until they’re totally obvious. That’s why they keep happening.

A lot of people will explain to others that it’s a Ponzi scheme, but those people are making so much money that hey don’t want to hear it.

Crypto is a Ponzi scheme, and it always was. I’m not just talking about these companies, being Ponzi schemes, I’m talking about the whole ecosystem being a Ponzi scheme.

You can either listen to those of us telling you cook those a Ponzi scheme or you can focus on your greed. Your choice.

At this point everybody is pretty competent at identifying pyramid schemes. Now people enter them willingly hoping to cash out on time, no different than gambling. The scam now is making people believe they are higher in the pyramid than they really are.

You don't have to listen to me or another expert saying that FTX was a ponzi scheme. Literally just listen to SBF himself. He described his business as a ponzi scheme. If that isn't obvious then I don't know what is. This is Coffeezilla's summary of SBF on the Odd Lots podcast with financial analyst Matt Levine

https://www.youtube.com/watch?v=sucxhGOv9ww

> Literally just listen to SBF himself. He described his business as a ponzi scheme

1. you should actually listen to the podcast, or at least skim the transcript[1], rather than trusting some second hand account by some youtuber. In the podcast, he's describing an abstract token that offers no utility, not FTT and certainly not the exchange itself.

2. At least from skimming the whitepaper for FTT, there's at least a plausible business model (eg. through exchange fees). That's not to say it's not a ponzi scheme, because many ponzi schemes claim they have a plausible business model, but that's different than literally describing yourself as a ponzi scheme. That would require you to put out a whitepaper that's like "we fully expect this token/company to make zero money and all profits to earlier investors come from later investors".

[1] https://www.bloomberg.com/news/articles/2022-04-25/odd-lots-...

I think your second paragraph is correct but contradicts the first. It’s not that these aren’t obvious so much as some people really wanting to find ways to ignore that so they can get rich without feeling like a scammer.

What I meant by " Ponzi schemes are not obvious, until they’re totally obvious. That’s why they keep happening."

Is that they are totally obvious once they fall apart. No contradiction.

Hey.

I offer a 10% return on stock market, every years, in bull as well as bear markets.

Does it sound legit ?

I was thinking something like undeniable or incontrovertible might be more apt to convey the period between something being obvious to an objective observer and when even people who are predisposed to want it to work acknowledge that it doesn’t. The magical thinking around blockchains is a good example where the flaws have been exhaustively discussed but there are enough people who don’t like the traditional banks (understandable) and are hoping that it can work if enough people try really hard.

A "Ponzi Scheme" is just about timing and perspective. A government may seem like a stable entity until it inevitably crumbles and looks like a Ponzi scheme. You just have to exit or shut it down before something bad happens to prevent anything into becoming a Ponzi scheme.

Most things are on some level a Ponzi scheme.

That said, I think the real problem here was undercapitalization. It seems akin to throwing a party at your home that has a structural addition not up to code, and then when it collapses under the weight, saying it was just bad luck.

No, they're not. The definition of "Ponzi scheme" is not "something financial I think is a scam" as most people use it. It's a very specific type of financial fraud.

"Everything is a Ponzi" is a lazy analysis only made possible by having a lazy definition of what a Ponzi scheme is

A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.

Many things from MLM to social security to VC markets can be viewed as a Ponzi scheme.

Your second paragraph doesn’t indicate that’s most things. Those are the obvious ones.

Here's the definition:

https://www.investopedia.com/terms/p/ponzischeme.asp

I think the point is that there are more structures out there like this than we think. Social Security for example. Just do a web search and you'll see it's a rather mainstream question. Also there are so many unfunded public pensions that could meet the definition.

Perhaps the difference is transparency. We know these public programs are currently in bad shape, but private schemes are completely opaque until they collapse.

Social security is brought up all the time as a Ponzi scheme. Do you have examples that aren’t represented well? To prove the point.

Social Security isn't a Ponzi scheme. It's not hiding how it's funded, has accurate transparent accounting, and isn't misleading anyone about it. It's more like insurance.

Pay as you go isn't a Ponzi scheme.

Then Bitcoin isn't a Ponzi scheme either.

It doesn't hide anything, it's far more transparent than Social Security, it doesn't mislead anyone.

I didn't call Bitcoin a Ponzi scheme.

It's more of a pump and dump scheme where people extol made up virtues to get suckers to put money in, and as demonstrated for well over a decade now, it's a complete financial crapstorm filled with theft, criminal activity, and people stealing incredible sums of money from the unsuspecting.

But sure, it's not a Ponzi scheme. It just makes them easier to do to people.

> But maybe it could have been?

Maybe for a while, but ultimately no - reality will assert itself even if you have stopped believing in it. Made-up valuations of faith-based assets are insubstantial, and anything that is entirely that is completely without substance.

There's no financial principle which says it is not a Ponzi scheme until you notice that it is.

Oh SBF realized it was a ponzi, he literally described it as such in an interview!

As if poor labeling results in $8bn of customer funds being lent to the CEO's hedge fund

>It's like recursive valuation.

Exactly correct. Most of these crypto companies hold assets that are nothing but tokens they or an affiliated entity print on demand. Just like how most of Tether's assets are commercial paper yet they refuse to name whose commercial paper and no one who makes a market in that space has ever dealt with them - it's obvious the commercial paper was issued by other crypto companies and likely secured only by crypto. And how exactly do people think all of those staking/farming operations are generating those ridiculous levels of "yield"?

> Imagine if JP Morgan Chase's entire value was in JP Morgan Chase stock,

It's way worse. JPM stock pays dividends in dollars. The yield on FTT is more FTT.

A predetermined percentage of FTX fees is used to buy back FTT which is then "burnt". Open market buy backs are equivalent to dividends. So FTT has a yield measured in dollars.

But you never get access to those dollars. You end up owning a scarcer magic bean. And dividends are not equivalent to share buy backs--both from a tax perspective and from a forced diversification perspective.

FTT did buybacks which are much more popular than dividends because of their tax advantage.

I mean they do that. Companies issue, hold, and buy back stock all the time. The difference is that JPM stock is a thing that people want and has intrinsic value as it confers ownership over the company.

Incredible.

To call all those "Less Liquid" tokens not "Illiquid" is a mastery in self-delusion.

$2.1B SRM $981M SOL

and then all the shitcoins built on those "technologies" where the tokens are their "shares" in those investments.

But to call those tokens valuable assumes there's value in MAPS/OXY etc.

But MAPS has a total market cap of $3.9m today - the forced liquidations in these positions will 100% crush these coins. Even SOL and SRC. Hell - other than their Robinhood position and the fiat and fiat-tokens, there's almost nothing of real value once these liquidations happen.

My guess is less than $700m recoverable, so if you get an offer for >$0.10/dollar on your deposits from a vulture bankruptcy fund, I'd take it.

Oh, and completely forgot about the "hack" https://twitter.com/SlowMist_Team/status/1591429649430519810

So even the less-shit coins SOL are just getting siphoned off.

I'd take $0.05/dollar now.

MtGox went bust in 2014, and it took them seven years of legal wrangling to come up with an acceptable valuation of the tokens. But MtGox was also based in a single country (Japan) and the vast majority of its funds were in a single crypto (BTC), whose value today remains far higher than it was back in 2014 ($300 or so), which is a big incentive for everybody to come to an agreement fast. FTX will be exponentially more complex on all counts: more jurisdictions, more tokens and almost certainly severely marked down valuations.

BTC

Yup - i'm a party in the Mt. Gox and it's just an endless stream of weird japanese legalese. Didn't have much so never got approached for a buyout, but if offered I would have taken it.

SOL trades $100s of millions per day, which is actually extremely liquid in investment terms. "Less than liquid" is actually quite accurate for lesser known crypto. It's how assets like syndicated debt, that trade much less often, would be described on a balance sheet. "Illiquid" would be more like equity in a private company, where there is no active secondary market at all.

Who are the people “trading” it all day? Unless you feel pretty confident you have a window into what exactly is going on there then I wouldn’t make much of a bet on liquidity.

Wash trading and market manipulation is basically the defining feature of all these markets.

Thank you! That’s been a big pet peeve of mine in this discussion, where people casually throw around “illiquid” when the currency is really “liquid but collapsed in value”, which is what was going on with FTT and SOL. Earlier comment:

https://news.ycombinator.com/item?id=33539326

“Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.”

https://www.investopedia.com/terms/l/liquidity.asp

You have misunderstood the meaning of liquid.

No, I didn’t. Read the linked comment and its follow-up.

Of course it’s a valid concept. But people hastily use it as a drop in replacement for any situation in which they would like more money for any reason, and to blur the difference between illiquidity and insolvency. Just like in the situation the parent described!

In the case of FTX, the value of their cryptos had already fallen, and they would take that haircut even if given extensive time to make that sale.

There was nothing that would make the cash flows match.

The story is the same for all these other giants of crypto.

Binance, Tether, Bitfinex are all basing their purported asset value on holdings of multiple worthless currencies, many of which they mint and price themselves.

Interesting to see that you and many others think that "the real financial world" works significantly differently.

Countries, (central) banks, family funds and hedge funds are about to fail (or are already failing) in a very similar way but on a much much grander scale.

Everyone’s a con-artist is neither accurate nor useful. Some things are clearly a con (the operations listed above in my view), most things are not.

the real financial world really does work differently. even bizarre instruments like credit default swaps are rooted in an asset of real value (homes). stocks, bonds, real estate, these are all connected to things that have value or produce value, corporations, governments, land. crypto tokens are pure speculative assets that have value only so long as you can get suckers to buy them. they’re effectively really incredible counterfeits, that will be instantly worthless the moment the moment enough people realize that the sucker pool has run dry

Is Binance really in that group?

CZ alleged that FTX tried to crash Binance's market a few years ago like Binance did you FTX last week, but failed because they actually hold reserves.

Yes Binance seem like a scam, and even if totally legit their net worth is in currencies which have fallen dramatically and will keep falling. They haven’t had a proper audit, so you just have to trust them.

https://www.bloomberg.com/news/articles/2022-11-11/binance-d...

SRM market cap isn't even 2.1B. There's more to this story as usual. The corruption runs deep.

Using the word "Liquid" in the context of these accounts is... I don't know? Fraudulent? I understand that in the context of real finances things might be illiquid - it might take time to sell your house, or if you're a particularly big holder of stock in a company you founded you might have liquidity problems divesting over time. But it's really just taking the piss describing a lot of this stuff as "illiquid". FTT is a coin that they have made up themselves, which they themselves own the vast majority of, and which only had value in connection to the exchange that they just bankrupted. So no, it isn't "illiquid" its "worthless". It's not just that they'll take a hair cut if they liquidate it quickly, they could never liquidate even a significant portion of this. This whole thing started when CZ tried to liquidate 500m in FTT and the whole of FTX collapsed, they're now claiming their remaining FTT tokens are worth $600m (down from $6Bn). It's just so absurd to suggest you can mark to market like that.

When the people who print the real currency are your friends, the people who are supposed to regulate who can print currency are your friends, and the people who lend you massive amounts of real currency are your friends - it is easy to delude yourself into believing that on a long enough time scale some of the plebs will buy your funny money and you will become more liquid and everything will sort of work out somehow.

Money creates more money, so if can can create money that creates more money, we're broadening the economy, expanding it all the time.. (https://www.youtube.com/watch?v=M_3T-Af57Pg)

Sort of similar to how Trump said his own net worth fluctuates day to day sometimes based on his feelings since it is tied to perceptions of the Trump name as a brand.

Or how George Costanza said it's not a lie if you believe it.

Or how a gambler who is down is sure he can make it back.

In other words, yeah, as fraudulent as can be. Lets see if anybody actually goes to jail.

Matt Levine’s writing on this is right along this line. It delineates between liquidity and solvency problems. Worth a read. https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is...

The whole thing that is bugging me is that they made big political donations to both D and R. They use the money they conjured out of thin air and backed politicians with it. They probably backed the politicians who were most friendly to them. Those politicians might have won and that dirty money might have done a difference.

Does that sound moral to you? I think it’s absolutely terrifying. Every candidate that received that money should have their relation to Scam Bankman-Fraud investigated. It gets worse when you realize his mother and business partner are either related to certain political parties and the SEC chairman.

Sounds like plain old moral hazard to me: https://en.wikipedia.org/wiki/Moral_hazard

Why people think that such things are limited to any one political party or that progressive liberals are somehow immune from it is beyond me.

Used to be a time, about a decade ago, where these very same folks would lose their collective minds when Mitt Romney said stuff like "corporations are people my friend" and "money is speech".

I guess if you can't beat them, join them. Heck, SBF even donated to Mitt: https://en.wikipedia.org/wiki/Sam_Bankman-Fried#Political_do...

Instead of fighting to get money out of politics they decided they can just play this game better and their ends justify the means with very predictable results.

The only surprising thing is they got caught. Although it remains to be seen whether anybody actually admits fault, goes to jail, or any actual changes are made.

The whole thing stinks to high heaven. https://cdn.discordapp.com/attachments/430493835265835021/10...

I don't know which discord the reply to me is supposed to be linking to but here it is in text form.

  A true scandal is opening for the Biden administration. April 25, 2019: Biden announces his presidential campaign. 13 days later, Sam Bankman-Fried, son of Barbara Fried ( Stanford Professor and co-founder of political fundraising organization "Mind-the-Gap), launches #FTX crypto exchange. The exchange is magically an overnight success. SBF becomes biggest donor to Biden. Election day, FTX implodes completely. If you think this scandal is done, it goes even deeper. Gabe Bankman-Fried, brother to Sam (also a former Jane Street trader), is founder of "Guarding Against Pandemics" He was a Legislative Correspondent for the US House of Representatives and an advisor to large political donors in the Democrat party. The family Aunt Linda Fried is a WEF member on the Global Agenda Council on Aging.

  The father, Joseph Bankman is a Stanford professor who has lobbied on behalf of Hedge Fund managers before Congress before (film records exist). FTX' Head of Ventures & Commercial at FTX Ventures Amy Wu, started with the Clinton Foundation years ago.

  Nishad Singh FTX Director of Engineering has spent over 8 million for Dem candidates. And finally Obama's Commodity Futures Trading Commissioner, Mark Wetien was literally the head of FTX Policy & Regulation. Reports were the organization wanted to spend over a billion dollars on the Democratic party for 2024. A massive, massive money laundering operation has just been broken open.

The tone is a bit conspiratorial and had this been posted before the FTX collapse my eyes would have glazed over. I happen to think guarding against pandemics is a good thing. Financing none-profits with crypto scams and donating to politicians who subsequently are reluctant to regulate you, less so.

Regardless of who is in charge and their political affiliations, it simply should not work this way.

But I thought the whole complaint about SBF was the enormous lengths he was going to in order to increase regulation, and effectively pull up the drawbridge behind him?

I think the whole point about campaign financing is well made, but the idea (implied) that this was some massive Dem ruse feels incredibly far-fetched, given the various investors and others involved. If you scratch at the senior leadership of many companies you're going to find political people of all colours, because lots of people get involved in politics.

There is no such idea implied, if anything I mean to say the opposite. We have to stop looking at things through a narrow political lens.

Whatever noises SBF was making about regulation - what actually appears to have happened is that he was (at best) incompetent and simply playing to whatever audience was listening. Who knows, maybe he even drank his own koolaid. After all he is so virtuous on other matters, surely this would all work out somehow, he is one of the good guys.

His regulators meanwhile (at best) placed undue trust in him for reasons ranging from shared politics and values on various unrelated issues to very large donations vaguely to their benefit. And why shouldn't they, after all he is so virtuous on other matters, surely this would all work out somehow, he is one of the good guys. One of them. And never mind how he got the money for the donations let's not stare a gift horse in the mouth. We can do a lot of good with those donations, after all, we are the good guys.

You don't need to assume a nefarious ruse. No nefarious scheming is actually necessary for any of this. Although since everything is politicized it will be assumed. Has been assumed. And is sort of implied in the discord quote. That is another unfortunate part of the problem. The people who were pointing out the smoke defaulted to harping on the conspiracy aspects because they are more interested in the political affiliation of the wrongdoers than the actual wrongdoing. Inadvertently providing cover for FTX to operate even longer.

In short, a bunch of incestuous wankers feeding into each others delusions and all too willing to look the other way on things they'd never let slide for their political opponents. FTX would never have happened had the founders politics been different, surely you see that.

And I'm sure if this pairing would have been a red instead of blue the same thing would have happened.

Scrutiny seems now to only be reserved for political enemies. Scandals are not swept under the rug unless they are by political allies.

> drank his own koolaid

Said to me, by a salesman: "A good salesman believes his own bullshit."

Banksters have been doing it for much longer and people hardly bat an eye at it.

Edit to add more substance and thought:

I know it's uncomfortable to address but it's true. On top of the money pulled out of "thin air" via electronic means by the central bank (US Treasury asks for a billion, fed manifests it in exchange for bonds, w/ the US fed at a 6% profit rake scheme, not sure about BoE, etc), the normal everyday banks as part of the fractional reserve system pull money out of "thin air" by loaning out more than they have on deposit. Furthermore, the fractional reserve rate which used to be 10% has been busted down to 0 afaik currently. Literally they can loan out money they don't have and the regional fed will bail them out with liquidity if it gets too bad.

I've known this for a while but in 2016 when I was considering running for congress and started digging into the funding sources of the incumbent, I started noticing a lot of NY banks donating to this random congressman, and pivoting out found that vast swaths of politicians have banks themselves donating money.

I think all political donations above a certain level should be scrutinized and audited and then banned at higher levels. But I don’t think the politicians care. They removed the limits to political donations and haven’t looked back, and it has been chaos ever since.

I was disturbed by Robert Mercer’s dastardly part in the 2016 election, both his donations, his people placing, and his technical consulting. The guy is basically a real life Bond villain. When you look into the other top donors of the Republican Party, you start seeing some real Machiavellian characters. The Democratic donors are not far behind in terms of greed and power, but it sure seems like some of the Republican donors just want the world to burn if it means they can keep their wealth.

> I don’t think the politicians care ...

Of course they don't, taken collectively. Investigative journalists are our slender hope. They and those few politicos who didn't get a share of the loot, and may now see pushing for tighter regulation as a career opportunity.

Iirc many do care; it’s tedious for them to spend so much time making phone calls sucking up and asking for money from donors. But apparently they don’t care enough or there is a coordination problem such that it doesn’t get fixed.

Oh so maybe that's what "effective altruism" really means.

> Scam Bankman-Fraud

no. Scam Bankrupt-Fraud

How is that any different from every other company/individual making political donations?

Yes the US gov is corrupt, if that’s what you’re implying. Anonymous political donations from special interests are the primary driver of public policy.

Okay, but... how? How did they manage to lose so much money by running a popular exchange that should bring in tons of fees? Even if they were gambling with part of the deposits, how can they lose 90% of all assets? You'd have to be actively trying to lose money to be this bad...

Also, where does Alameda fit into the picture?

They were probably leveraging heavily in some sectors, on top of siphoning those incoming fees to line pockets. Once you leverage, it is extremely easy to lose everything in a span…but also easy to gain!

Seems like Alameda was critical to the how of it.

What's not clear to me is what they gambled on that lost money.

Business model ought to be simple, the exchange earns loads of fees, and Alameda makes markets on it, earning spreads.

Just putting a lid on the risk there should be enough to keep people occupied, no need to print your own money for extra leverage.

SBF is a con artist. There is no point looking for a legitimate business because there wasn’t one.

Running an exchange is a legitimate business that should make tons of money if you're not embezzling customer funds.

It was not a legitimate business, there were almost zero controls on cashflow.

> What's not clear to me is what they gambled on that lost money.

My guess would be other crypto ventures. All these crypto companies pumped each other with no products/assets (Stadium names and soccer team sponsorships with no products to sell!) and invested in each other. The economy had so much excess money and they got pumped and they thought this is what "investing" is. Economy's bubble burst and suddenly their valuations goes to 0.

When economy goes bad everyone is hurt but these companies had nothing but vaporware and are vaporizing as a result.

Just a guess though.

But any kind of illiquid venture investment is just money out of your trading capital. Maybe Tom Brady takes tokens in exchange for doing adverts, but I doubt that stadium uses FTT to pay its employees. Likewise with any other venture, you need cold hard cash.

Swapping whatever cash you have for FTT in order to invest it elsewhere just seems insane. You've got a business that creates cash, and needs it for deposits and margins. I mean sure, split out some into a venture business, but be sensible and keep some for the cash cow?

Also, hire an adult to tell you this. Would have cost barely anything to get any old finance professional to come in and say that.

It does seem like it would be so easy to not fuck this up. Fees are high on the crypto exchanges and you've got so many people day trading or even trading via automation that you should do well.

But I can imagine how it happens. It is some massive fucking bull market and you see your peers doing shady things (20% APR! Zero risk!) and making shit loads of money. You've got this trading arm that is making shit loads of money during the bull market. So you do a little double dipping and it work! Hooray you are making everybody richer! So you do a little more. And a little more. And then oops Alameda is losing a lot of money. But don't worry this is just a blip. Those folks are smart. Hmmm... this is taking longer than we thought to come back. They just need some temporary money to get through this. Don't worry, they've still got huge assets. Oh fuck, their assets are tanking and they are still losing money. Kaboom.

You need to have somebody in the room who can say "yes I know this strategy is making money right now but we absolutely cannot do this." And it is already hard to have that person in the room normally, let alone when you are a company make up of people in their 20s who are told they can do no wrong and also believe that it is their moral duty to make a shit ton of money so they can funnel it into some weird effective altruism mission. If you believe you are saving the world then that 20th billion is still important, whereas if you just want to be rich as fuck then it really isn't.

Exactly. With the perfect order flow information and ability to front-run other MMs and takers Alameda should've been highly profitable just making markets on FTX. How could they lose so much money...

Just watching a video of the Alameda CEO explains a lot.

In addition to earning a spread you lose from toxic trades, i.e. someone trading when your quote is stale.

Alameda has a strong incentive to knowingly do bad trades on ftx, i.e. stale quotes + spreads too small, since it increases legitimate volume numbers and generates ftx fees (gains in ftx fees offset trade loss). It's unknown if this happened or to what extent, but it can be very costly to do this in large size.

Yes but you can control this, turning it on and off as you like, and indeed market makers do this. It wouldn't explain a catastrophic loss though, it's more like a slow bleed that you balance against whatever income you're making.

If you're willingly doing this to boost the exchange, the whole point is that you keep it going even if it's in the red.

Certainly won't catastrophically explode the maker but it doesn't help if you're already hurting somewhere else.

I think it was mentioned that one of the reasons was they tried to bailout voyager but voyager went under anyways. They extended a 500mio loan from alameda, which would explain a good chunk of it.

Also, having listened to the FTX podcast a few times just to get some idea of what their magic was, there was one episode where Caroline came on, and the gist of it seemed to be that the host Tristan and a lot of the heavy blockchain cool-aid drinkers managed to convince Caroline to toss out good old risk management principles and Yolo it on defi and nft projects. They referred it in Their podcast as "the summer of defi". I guess that might have been a reason as well

They stole clients assets and used them to:

1- Gamble with them

2- pay themselves

3- lobby the government

4- bailout other failing crypto companies.

Everything here could have been done with any non-crypto exchange.

How would a regulated exchange gamble with clients money? It's even technically impossible for all they do is managing a place where participants trade.

Most banks loan their customer assets out. You money isn't sitting in a big Scrooge-McDuck money pit at Citibank -- it gets loaned back out to other people.

My point was specifically about an exchange since the claim was "Everything here could have been done with any non-crypto exchange".

I fully agree with your point about bank deposits. Unlike ftx, however, the banks are tightly regulated and monitored.

Kind of sounds like Chase / Washington mutual when you put it like that

My vague guess is they need money to spend on advertising and investments made by Alameda and FTX.

For that, they can't use FTX. They need USD or a stable coin like USDC.

They can't convert hundreds of millions of dollars of FTT to USDC since demand for FTT is relatively small. And a transaction like that might cause a huge decline in the price of FTT.

So they must have used ETH, BTC etc deposited by customers for swapping to USD or USDC.

I guess their theory must have been the surbowl ads, celebrity endorsemens and all would result in demand of FTT going up after some time. And they can later swap them back to customer funds when required.

But then crypto crashed.

Now customers want to withdraw the funds and they don't have it to give back. And nobody wants FTT.

Well firstly they were offering perps[1] which are a margined product. If you want to trade with margin on a regular exchange (like say you want to trade commod futures on CBOE or ICE or whatever) you contact a broker/dealer and put up collateral[2] to get margin. FTX was seemingly both acting as an exchange and as a broker/dealer so they were providing the margin and standing risk on the other side of certain trades either as FTX themselves or as Alameda (I'm not sure about this).

Margin has the effect of magnifying the effect of volatility in the value of a product on profit and loss. And of course crypto is extremely volatile to begin with (by comparison to other assets).

Since they were acting as a dealer they could lose a lot if their book of business was imbalanced (ie on net a lot of their customers have the same position) and the market moved against them.

Secondly they seem to have had very little equity as a reserve against losses and what equity they had seems to have been in this FTT token which was only backed by the exchange itself. So if the FTT token lost value they would lose all their equity and have no reserves to protect against losses. This happened when Binance tweeted that they were selling their (very substantial) FTT holdings. In normal finance your equity reserves are there for if you have a bad day and lose some money - you can dust yourself off and try again the next day. If you have no equity then your business is insolvent. Trading when insolvent is no bueno and if there are rumours that you are insolvent of course people pull funds, won't trade with you so you have effectively a "run on the bank" and all the problems you had before get worse because now you can't find anyone to trade with as you try to wind down positions to refund customers etc.

Thirdly there seems to have been shenanigans afoot regarding Alameda (the affiliated hedge fund) which seems also to have primarily been long FTT and a bunch of other similar tokens backed by not very much. It may be exchange funds were being used by Alameda for trading - certainly they don't seem to have been kept at arm's length as they should have.

Fourthly there have been allegations that customer funds from the exchange were somehow inappropriately used to cover losses either at alameda or at FTX itself. If this is not true, it's hard to understand why refunds are taking any time at all so make of that what you will.

[1] Essentially a leveraged swap on the price of a particular crypto. So one party will pay say 10x the difference between some reference price and the current price of the crypto and the other side will receive it.

[2] Assets with a certain value as security against losses. Generally you will be required to have collateral which is liquid (ie can be easily sold if need be without affecting the value of the collateral) and relatively risk-free (like treasury bonds). For collateral that is risky, the dealer will take a "haircut" off the face value of the collateral to account for the fact that they may not be able to sell the things for the market value. The market itself (and Alameda) had collateral (FTT and similar) that was on the whole neither liquid nor risk-free.

> perp

It's incredible that 1) crypto "finance" is full of products whose name screams scam, and 3) a perp(etuity) is like a fixed-term annuity except it's supposed to lay out forever, but no crypto perpetuity has been existence (and most have already failed) for longer than any annuity term.

In this case perp is short for “Perpetual Swap” (or “perpetual future” depending on the way the structure is set up) ie there is no expiry date. But yes.

It could equally be short for “perpetrator” in this case in particular.

> usiness model ought to be simple, the exchang

They were greedy and counted on a bull market. Basically used money that's not theirs to speculate on shitty coins. Shitty coins went down in value along with their customer's deposit. Think about borrowing money at the bank to buy BTC at 60K. You'd be on the same spot.

Direct link to the image of sheet itself: https://d1e00ek4ebabms.cloudfront.net/production/7ab64a3b-6c...

The thing that I always wondered about with FTX (and Binance frankly) is how did they get so big so quickly. What did they have that caused so many people to use _their_ exchange. This is still unexplained and was a major red flag. Usually to grow that big takes many years. Just look at Coinbase.

I don't know about FTX, but Binance has been shady from the very beginning. They got large quickly because they listed all kinds of **coins, had negative trading fee promotions, and in general did lots of shady growth hacking marketing tactics and partnerships. If you wanted to gamble altcoins, those would be on Binance, but not listed on Coinbase. That was many years ago when they started out of course. I'm curious where they are today. In my mind, the shady image of Binance hasn't changed, but maybe they got lucky with their investments and are actually fully backed and profitable now. Who knows...

Coinbase used to be US-only, and is still very US-centric. Binance and FTX are international. They only opened US exchanges later, but they are separate, and tiny compared to their international footprint.

I'm also curious how FTX got so big. When they started, the market seemed saturated with exchanges already, and they didn't really have differentation.

Still get emails from Binance constantly: "Earn 3.6%/3.9%/4.1% when you stake ... FTM/ONE/ROSE". Just scrolling down, they offered 15% on DOT back in August!

They offered this because it’s the staking reward the Polkadot network rewards for staking your coins. Binance just offers you to stake with them and in turn gives you part of the rewards. The 15% are paid in DOT though, so your dollar return is dependent on DOTs performance.

I guess it goes to show even in the face of all the scams there remains a massive appetite for [seemingly] legit markets to buy/sell coins. Boggles my mind these idiots can't simply be satisfied to run a profitable, lawful operation.

I think the issue was they were creating the market for these *coins.

The reason people wanted to gamble in these alt coins is the wild returns. These returns would not have been possible if these business had operated as a lawful like gambling operation.

Chances are those satisfied people exist, but you never hear of them because they never left bootstrapping territory. Honesty, modesty and getting investment, you can pick at most two. Because telling a would-be investor "I'll be happy breaking even" is equivalent to openly announcing that you'll steal their money.

An interesting observation: first people get used to trusting e.g. Coinbase, in the slow, organic way of trust to grow, then they see a similar company, the brain does that category drawer game and suddenly the new company gets trust by similarity. Certainly not the full amount but a much better start than the first one had. I wonder if there's already a term for that? What's even the field where these observations would be collected?

The innovator's dilemma

FTX splashed money on sponsorships and ads. It either had a lot of investor money or was a ponzi from the beginning

Marketing with enough money you can make every fraud legitamite for some time especially now in the world of influencers.

Binance was publishing fake volume numbers (basically a sine wave chart) up until ~2018. They faked it until they made it.

The only reputable exchanges are KYC/western based Coinbase, Kraken, Gemini, and perhaps some of the smaller US based companies.

Honorable mention to Bitmex, which was truly financially innovative (basically what FTX and other crypto futures exchanges tried to copy) and admitted exactly what it was (a place to trade with irresponsible leverage). Their only mistake was not trying that hard to prevent US nationals from yoloing on their site.

And a week ago you would have included FTX in that KYC "western" list esp since they had so many big "western" investors and Washington's ears including the SEC.

Not to mention Bitcoin and crypto were created out of the failures of the trusted KYC "western" banking standards of 2008.

You are literally repeating blind trust mantra based on region bias that has just failed again this week.

Crypto is about avoiding the need to trust any of these entities, if it still hasn't enabled that maybe it isn't mature yet as an industry. CeFi or not.

FTX pretended to be that but they were based in the Bahamas.

Also Kraken has verifiable proof of reserves.

Kraken and FTX/Binance are essentially not even in the same business (Binance is almost certainly quasi criminal or dodgy if not worse).

FTX.US is based in the US and that didn't solve the fundamental issue of manhandling funds.

KYC didn't stop anything, the fraud was internal.

If proof of reserves was enough for you then Binance is on the same level as Kraken. It does sound a little hypocritical if you hold them to different standards if that was your issue.

From my understanding Binance took a more DeFi route while FTX/Coinbase were pushing for CeFi.

CZ doesn't inspire trust, but I don't think he is seeking it either. Unlike say SBF who had contracts where people HAD to praise him(YouTubers) and cultivated a persona of "honesty" - while ruthless destroying other projects, you are seeing just how many now and time will only reveal more.

If I wanted crypto to act like a bank, I'll just open another bank account.

I rather they build products that make life easier for others, than all the traditional derivative junk or yield scams that happened in recent years.

There is too much filth in the current system that exploited a good idea, let the tide recede and expose those who were swimming without pants.

Nobody is saying KYC is a guarantee, but whether it's a coincidence or not, the exchanges I consider to be safest are all KYC and based in jurisdictions where fraud == prison.

I would also add Bitstamp to the reputable exchanges list. It's operating since 2011 and holds many operating licences across EU and US.

My guess is they managed to get market makers in there due to connections. This creates liquidity which is a virtuous cycle. They also had early attention from being a top trader on bitmex iirc.

Fair bit of luck needed as well since there's hundreds of exchanges launched at around that time.

There's no explanation that doesn't require luck, but there's also no explanation that doesn't require having the prerequisites of liquidity and marketing.

Close ties to the Biden admin. Sams parents are very close and worked in both the Obama and Clinton admins. Question is will the DNC return the 40 plus million given to them from San Bankman?

Back in 2017 when there was an new coin spiking every day Binance was by far the easiest place to sign up and trade. Everywhere else had either much stricter KYC or a much worse reputation.

It’s likely Binance was so much easier because they were ignoring KYC laws, but I’m not a lawyer.

I think this is it.

Low bar of entry, largest marketplace, and a decent API

I am quite surprised that nobody is talking about VCs (Sequoia) that happily poured money into this.

What was their plan? Were they blind? Were they hoping to cash out before it crashed?

Major investors usually get full visibility into the company.

This is the most important thing I was wondering about. If crypto businesses are shady and Ponzi schemes and these crypto guys are working mostly behind the scene, why would a VC like Sequoia invest in such firms?

I somehow feel firms like Sequoia gave these crypto stuff some credibility and positive exposure. It was like, "don't worry, their business is legit and booming.'

> why would a VC like Sequoia invest in such firms?

I thought the rationale was already widely known by now: https://en.wikipedia.org/wiki/Greater_fool_theory

Or in more charitable terms: if an investment has a positive expected return according to their model (meaning that they think they can sell their shares / tokens in the case of some VCs), they do it.

Who was the greater fool? Sequoia gave SBF money and SBF stole it.

Sure, I didn't say their model was correct.

Some kaching on the side. ;)

Seriously though, a lot of influencers promoting this stuff have been getting paid in cold hard US dollars to promote these scams.

How do I know? I spoke to influencers to talk about my portfolio companies and many of them told me the crazy amount of cash they were getting paid from these scammers. Think 25,000 for a channel with hardly 100k followers.

That's why I feel like Sequoia partners should be investigated thoroughly. If a terrorist organization gets investments, don't we investigate those investors as well?

If you drop morals, like a16z did, by supporting another scammer and gritting on crypto, it's a very lucrative business.

That's nothing compared to what stake and the other bitcoin casinos have been spending on influencers. Until twitch banned them their top sponsored streamers were making a reported 2 to 3 million a month.

Likewise there's tons of crypto money sloshing around the esports world. FTX paid TSM 200 million for naming rights.

In an environment like this its really hard for legit sponsors to pitch influences unless the influencer is personally interested or ethically refuses to work with the crypto sponsor whales.

The biggest gambling streamer, TrainwrecksTV, was making 360 MILLION DOLLARS for 18 months of nonstop gambling. Like, wake up, gamble for 20 hours straight, go to sleep for over a year. https://gamerant.com/twitch-trainwreckstv-360-million-gambli...

Can't exactly blame the guy either. I would give up a whole lot and a year of my life for half of what he made.

SBF invested heavily in Sequoia as a limited partner. Him raising money from Sequoia in return was a way of adding legitimacy to his empire. Sequoia's motivation was simply to make money. Even famous VC firms aren't immune to making dumb decisions or falling for some fantasy hype rationale. Sequoia had a very fawning blog piece on SBF up that paints a very unfavorable picture of the decision making here, and hilariously enough they were proud of it until the bubble popped.

If you listen to the All-In podcast, or the Pivot podcast there have definitely been some rumblings about certain VC firms doing extremely questionable things with regards to crypto. They don't name names because... well, they don't want to burn bridges/get sued. But it's not difficult to guess which firms will be under scrutiny, Chris Dixon obviously is the most outspoken crypto guy. The question over the next few years is - how have his funds performed. If they've performed anything like crypto he's going to give terrible returns, if they haven't performed anything like crypto I think people would like to know how he managed to create a crypto investment strategy that had a positive ROI, given that the only way money has been made in the cyrpto space so far is pump and dump.

Sequoia must be utterly humiliated by this. They didn't just give him a ton of money, they promoted him like he was messiah of finance.

https://twitter.com/philbak1/status/1591409852957732864?s=20...

Not just Sequoia but also Temasek, the Singapore gov’t fund and they’re keeping quiet about it since the binance bailout fell apart.

Even these accounts are deceiving.

The current holdings are valued at today / yesterday's spot rate.

Given that many of these holdings are in (comparatively) thinly traded alt-coins, as soon as you try to dispose of these levels of coins / tokens, the price will fall as supply overwhelms demand.

Of course, this is represented by the fact that many of the alt-coins are marked as relatively illiquid -- and SBF has put a lackadaisical disclaimer at the top about the shifting price.

But the reality is that regardless of how long you wait -- or how much you try to spread the disposals -- you will only ever get a percentage of the current spot rate, given the impact that the sales will always have on the price itself.

I can't shake the feeling that SBF might say... "Yes, but once we have reassured the market, etc, etc, these alt-coins might recover in value -- and then we can dispose at this level."

And, of course, the merry-go-round starts again.

This is wild. My first question was: who is the CFO who signed off on this?

FTX literally has no CFO [1]. How is this possible for a billion dollar company and billions in client assets? How did the investors not insist on an adult to manage the their investment?

The CFO, and the credibility they bring to the table based on their track record and reputation, is part of the system that helps prevents situations like this.

[1]: https://www.ledgerinsights.com/ftx-warning-signs-no-cfo/

That is literally jaw dropping. I'm almost amazed that the WSJ never picked that up. I just did a quick search on the wsj.com site and saw several articles from this past summer and none even mentioned that.

WSJ nailed it with Theranos, missed it with FTX.

FTX likely printed SRM token out of thin air to prop up their balance sheet.

https://mobile.twitter.com/LucasNuzzi/status/159159590823988...

Martin Shkreli (pharma bro) did a livestream on youtube[0] going over it a few days ago. Yes, he is out of jail.

[0] https://youtu.be/XnwRMaW-Kdc

Im genuinely intrigued by the $2.2 billion in SRM

The peak market capitalisation of SRM was less than 1.5 billion (according to coinmarketcap.com ) . So how could FTX's holdings every be valued at 2.2 billion?

Ah, I think FT story made a mistake, it isn't 2.2 billion dollars of SRM, it is 2.2 billion tokens. Biiiiiiiiig difference.

It’s 2.2 billion dollars - but it’s using fully diluted value rather than circulating supply market cap.

Yeah, you are right. That is still bonkers crazy nuts.

Even more bonkers is who minted all of those coins? Was it FTX?

The only lesson I learend from this whole debacle is never trust people and organisations you know from the Internet no matter how famous or humble or good they are. Trust the tech. But never the people. Especially for financial advices.

Be it Sequoia. Or Yc. PG, Chamath, Mark Cuban ,Balaji or the Collision brothers. Tom Brady or SBF or CZ. Never fucking trust people or organisations.

They are all here for their financial upsides.

Only trust the tech. The maths. If you can't do the work you would be fucked by them.

That's all.

I am not saying PG did something shady. I am saying even a well regarded figure like him in this community should not be taken for granted unless they back their claims by sold evidence.

you definitely shouldn't trust NFL quarterbacks. https://people.com/sports/former-packers-quarterback-brett-f...

What I learned from this mess: nothing new. If anything this just reinforces what should already be painfully obvious: invest in real world value that you understand. I have not seen the real world value of crypto or understand how that makes makes outside of itself. Even before crypto currency markets were a thing and were like setting money on fire.

I apply that reasoning to all investments. Sure, I miss out on all the easy money hype trains, but the investment decisions are almost always safe and still better than market average.

the Warren Buffet mantra to investing. Been working now for 70+ years.

Why trust the tech if it is built by the same untrustworthy people?

The truth is that for something to be truly spectacular in moving humanity along, you need both tech AND people. You named a bunch of celebrities…OF COURSE you shouldn’t trust those people, you don’t even know them.

Not trusting anyone is just a good way to grow old and bitter about the social state of the world.

I should have clarified. By don't trust people I mostly meant people you know from Internet and have never had a meaningful relationships with.

they have provided no evidence for which trust should be placed on their company or product.

Trust needs to be earned, and over a long time. Even a large company like google, have lost the trust they used to have, and have barely retained any back.

But if you trust people on the internet, at least your personal life won't implode in formation with your financials. MLM like herbalife and countless smaller ones, many of them in financials also on the product side, had already been preying on personal relationships before Satoshi even tossed his first coin at a hash function. Don't trust anything that looks to good to be true, and be wary of those that might be carefully tuned to stay just below that threshold.

Gotcha, makes sense. Unfortunately the phase “never meet your heroes” ends up true more often than not.

Funny how my takeaway (as someone completely removed from the action) has been the opposite: don't trust the tech, filter for trustworthy people. Time and time again we are shown that tech is not solving the human problem of greed and malice, and some kinds of tech rather amplify it.

How do you tell that people are trustworthy in the first place?

Especially if they got conned? There were plenty of trustworthy people trusting sbf.

By iterated experimentation, mostly. Social relations are a skill built on give-and-take actions on all levels, from the trivial chit-chat to lifetime friendships.

https://ncase.me/trust/

Look for signals and be skeptical I guess. Watch for over-promising. For someone giving advice, try to imagine how they could be paid or gain from selling you on this, or whether they could be influenced by people who do. For someone offering to take your money, do due diligence, look for track record and whether they make legal recourse early available. For example, transacting in cash or something similarly attractive to money launderers could be a red flag. (And yes 98% of subject industry should probably not be trusted so your filter has to be really selective.)

Make sure they have skin in the game[1], make sure they know they have skin in the game, and trust them with big things only if they have a good track record with smaller ones.

[1] In the case of dealing with money, 'go to prison if they steal it' does a pretty good job of filtering out the most common hucksters.

A dishonest man you can always trust to be dishonest. It’s the honest ones you should watch out for

That sounds techno-utopian to me. You can't get around trust to people. Technology is run by people using rules and abstractions people agreed to adhere to.

Yes avoiding trust and attempting to construct something trustless is the biggest flaw in the bitcoin whitepaper.

Trust and identity are fundamental in financial transactions.

All these people are saying "not your keys not your coins".

Should we not do that because, with one voice they are all saying that you should do that?

That is a statement one can easily verify through tech and from first principles. For example you can go through the wallet source code and verify the algorithms used.

Trust me we have the funds backed 1 to 1 in our exchange is not unless proven cryptographically.

If there comes a day pg makes his twitter handle pg.eth or whatever nonsense a bunch of these guys were doing, I would lose all respect for him. But without that what PG and YC have provided is incredible value. Real world tangible value. Do you remember what snakes VCs used to be before YC came to the scene? Now my only fear is that Garry Tan on the other hand is indeed deep inside these scams whether knowingly or unknowingly. I hope better heads around him keep him and YC safe.

If you think YC somehow provides protection against rat duck games by VCs I have some very bad news to share with you.

I have spent and worked with VCs for over a decade. I agree that VCs like a16z and Sequoia are still snakes but YC is a forcing function for them to at least act like they are better.

FTX violated ancient banker wisdom: don’t get high on your own supply.

I haven't verified this for veracity, but supposedly a screenshot from tumblr blog of the CEO of Alameda Research

"this blog endorses double-or-nothing coin flips and high leverage"

https://pbs.twimg.com/media/FhaKXhRXwAEfvKD?format=jpg&name=...

I believe it is true, and there was a good thread on twitter about Kelly optimal bets. It seems clear that SBF, and maybe therefore Alameda, didn't really understand the right hand side of the Kelly optimum.

It's kind of an interesting puzzle though. It obviously doesn't work but breaking down exactly why it doesn't is a bit nuanced.

The simplest model we can make is that the market will instantly jump either up or down. Why does the strategy not work in this case? If it jumps up you win. But if it jumps down you lose not just your stake, but you actually go into debt because of slippage. However if you add the possibility of call bankrupcy to discharge the debt, then it actually does work.

On the other hand if you use a more realistic (but not fully, of course) continous model, then it doesn't work. Why? Because there are such a high proportion of paths the price can take where it reaches your stopout before it reaches your payout. It could go down (game over) up up up, or it could go up up down up down down up down down (game over). I believe you can use martingale theory to prove that it doesn't work.

What the fresh hell? This isn't even an actual accounting balance sheet. He was trying to convince investors to put billions of dollars of actual money into FTX, and the best he could do is the sketchiest one-page Excel ever, complete with comments like "Hidden, poorly internally labled fiat@ account" (sic) worth 8 billion and warnings about typos! No wonder CZ got cold feet.

Somehow this same level of sloppiness, disorganization and disrespect was a mark of a great disruptive innovator just two months ago.

In the Sequoia profile they greatly admire how Bankman-Fried plays League of Legends while pitching to investors, and takes naps in his office when he’s supposed to be in meetings. How surprised can they realistically act that their genius lost 8 billion dollars in a “hidden, poorly internally labeled account”.

The investment industry needs to face their role in this debacle. The Ontario teachers’ pension fund sent tens of millions to FTX with apparently no due diligence. That money ended up in the pockets of crypto insiders and also funded promotion like Super Bowl ads that sucked more retail dollars into FTX. Some of those poor FTX customers who are facing a 100% loss on their crypto “investment” may have been teachers from Ontario.

Pension funds and VCs don’t generally invest in gambling and drugs. Why do they invest in crypto?

Remember how the immaculately organized and professional appearing Wall St. firms did the exact same shit back in 2008? The only difference is really that they had the political clout to get a government bailout.

https://www.theonion.com/crypto-confidence-soars-after-ceo-d...

Which exact Wall St. firms took all their customer's deposits and bet them all on the Kentucky Horse Derby, while filling their balance sheets with their own equity, and self-printed scrip?

There's a lot that went wrong in 2008, but none of it looked anything like this.

MF Global

edit: And a ton of others, like every major investment bank (who also used customer funds as collateral for prop bets) except that the government bailed them out.

That's a fair point. The main difference between the two seems to be one of scope, and it's ridiculous that nobody at MF Global went to prison.

I worked for a fund that lost a lot of money once. It was all legit, nothing shady, just dumb investments gone wrong.

We phoned one of these well known investors to tell them what had happened. By that of course I mean the person in charge of the little piece of the massive fund that was allocated to us.

On the call the guy goes "when I tell my boss in 5 minutes, I'm going to get fired for investing in you". He wasn't wrong.

The thing that shocks me is the due diligence. There's a heck of a lot of things you have to do to get Ontario to invest in your fund. All sorts of documents, double signature statements from banks, meetings where you wear a suit. We'd have lost the investments if we were playing video games, there's no doubt about that. Maybe culture changed but it seems really odd, because part of due diligence is qualitative: does this team seem like serious people?

It’s because the Sequoia investors and funds and VCs were applying a pattern that actually sort of works for software onto a financial services company.

If you’re building consumer facing software like a social network or app, and you have massive wild growth, you have a money printing machine in progress.

It’s pretty straightforward to get there with a seed of blind luck and some sweaty immature skilled tech guys from top schools who have literally no fucking idea how to actually run a company.

Everyone has seen that before. It works out. You invest the money they use it to hire people who know how to run a business and you win. You have no internal controls or systems for awhile and some accounts get nuked and there’s a breach or two and it doesn’t matter it’s a photo sharing website.

Then you apply that logic to healthcare or financial services and they make a Netflix mini series about just how much of a fucking moron yoi were for not understanding those are fundamentally different business models.

Because this is what FOMO looks like. Real FOMO. The kind where even people who are finance sharks end up looking at the wild hair and the unfiltered disrespect oozing out of bros like SBF, and figure there must be magic in those beans even if they don't quite get it and it doesn't quite add up. MAGIC. THE MOON. DIAMONDS. Can't fake those billions, or the blatant fuck-you signalling. Means the emperor is surely clothed. And a genius. The deep abasement and sloppy sucking sound coming from smart, distinguished people helps complete the picture.

Hey man, move fast and break things. Professional accounting practices are nothing but “gatekeeping”. Hack the fucking plaaaanet.

The protagonists of Hackers were way more competent than this crew.

Well, obviously. They were the elite.

they try to bring that silly mindset to healthcare too. And they are surprised that doctors are refusing to embrace it, and they are facing roadblocks at every step. move fast, break things work if you are building photo-sharing networks, or messaging platforms, or optimizing ad-delivery. It doesn't work for healthcare or finance or even hardcore engineering. Rules and regs in those areas are written in blood or recessions.

You are implying that CZ is doing something more legit and transparent. I belive both were on the same boat and playing the same game. It is just that FTX lost the game first.

Binance definitely seems to have a better ratio of assets to liabilities.

Based off the balance sheet FTX may have peaked (September 2021) with more than $100 billion of paper gains in "less liquid" assets.

  Token   Last wks  Last wks  Estimated   Peak     Peak         Peak
           value     price     holding    price    date         value
  FTT     $5.9bn    $24.00       246m      $77.69  09-Sep-2021  $19bn
  SRM     $5.4bn     $0.75     7,240m      $12.50  13-Sep-2021  $90bn
  SOL     $2.2bn    $32.00        70m     $258.78  07-Nov-2021  $18bn

Just speculation, but once you've "made" $130bn you feel like a genius. You might want to start acting like a hundred billionare. Time to start throwing money around. Especially spending it on anything that helps you realise those gains.

But FTT/SOL/SRM is not very liquid. So you use your liquid assets (i.e. your customers' USD, USDT, BTC and ETH). People might wonder where you get all this cash. You don't want to admit you are using customer funds and you only have gains on tokens you printed. So pretend you're genius trader and run a highly profitable exchange.

Does he really expect anyone to believe his “poorly labeled internal ... account” story? How can you have $8 BILLION mislabeled? As in, if he transferred or loaned it to Alameda, literally no one was asking: wait, where did this sum of money, so large that it is a massive percentage of our value and could crash the company, come from? Despite all the idiocies that we’re learning about, it is still hard to believe.

Another thing is, it seems like this spreadsheet was hand-crafted by Sam Bankman-Fried just before their emergency meetings this past week. Why wasn’t this something that already existed for all top executives to see? How was it not just a printable document or report but was instead something he just typed up? Because no, it is not obvious that a balance sheet of a supposedly multi-billion dollar company would contain typos. Typos!? I mean, come on.

Then again, I have worked with people similar to how Sam Bankman-Fried seems to operate. Not the possible sociopathic tendencies he appears to have but the sort of twitchy smarts he does seem to have. People like that can sometimes think so fast with a lot of confidence that they create this wake of stuff behind them as they work. They “solve” (i.e., move through) problems so fast, that everyone gets lost in the wake and can’t catch up to find all the mistakes left behind or tie the loose ends together. They consider a problem solved if it’s essentially solved but doesn’t have details thought out or if there are possible mistakes that can be “easily” solved in ways not apparent to anyone else. If there’s no one around to slow these types of workers down, it can be complete chaos where you have one person spearheading away through the bushes, while everyone else is getting slapped in the face with the branches snapping back and thorns. At some point everyone gives up trying to follow. Then the person is off on their own where they lose sight of whatever actual problem they were solving and lose track of the bigger picture.

It is entirely possible that that is a component of what has happened here, coupled with some sociopathy, megalomania, and billions of dollars of funding in Sam Bankman-Fried’s case.

> you have one person spearheading away through the bushes, while everyone else is getting slapped in the face with the branches snapping back and thorns.

You just described me about 15 years ago. I've learned my lesson and avoid "unsupportable solutions" these days like the plague, but I still get pulled aside occasionally and get told quietly that nobody understands why I'm talking about solutions to problems that haven't even come up yet.

My mental model of the blockchain industry is akin to FTXs balance sheet.

I see an endless string of branded code servicing similar technologies, but where are the customer inputs putting in the billions needed to support the industry? Is blockchain liquidating crypto valuations into developer salaries with a VC subsidy?

Is banking liquidating bank account funds into banker salaries? Sry for being the advocate of the devil and I am by no means a crypto fan

Banks are the medium for money created by the government to reach the economy. So perhaps one can say banker salaries are the vig on inflation.

They take a cut on every loan that is successful, they don't take those fees from bank account balances, the borrower is ultimately paying for it.

Good tweet on decoding the illiquid assets

https://mobile.twitter.com/metavestor/status/159120025903564...

The stories so far (HN items with >100 comments):

Tuesday 11/08

129 https://news.ycombinator.com/item?id=33518961 FTX Appears to Have Stopped Processing Withdrawals, On-Chain Data Show (theblock.co)

747 https://news.ycombinator.com/item?id=33520585 Binance to acquire FTX (bloomberg.com)

110 https://news.ycombinator.com/item?id=33523274 FTX Token, FTT down by more than 80% in less than 24 hours (ftx.com)

Wednesday 11/09

430 https://news.ycombinator.com/item?id=33535161 FTX’s financial black hole leaves Binance balking at rescue plan (bloomberg.com)

420 https://news.ycombinator.com/item?id=33537821 We will not pursue the potential acquisition of FTX (twitter.com/binance)

Thursday 11/10

189 https://news.ycombinator.com/item?id=33541790 Ftx.com Has Probably Collapsed (effectivealtruism.org)

197 https://news.ycombinator.com/item?id=33547102 The Sam Bankman-Fried empire crumbled. What happened? (mollywhite.net)

516 https://news.ycombinator.com/item?id=33547863 FTX tapped into customer accounts to fund risky bets, setting up its downfall (wsj.com)

Friday 11/11

108 https://news.ycombinator.com/item?id=33558225 FTX Yikes (rekt.news)

1168 https://news.ycombinator.com/item?id=33561234 FTX to file for U.S. bankruptcy, CEO resigns (reuters.com)

Saturday 11/12

800 https://news.ycombinator.com/item?id=33570274 FTX faces potential hack, sees mysterious outflows totaling more than $600M (coindesk.com)

174 https://news.ycombinator.com/item?id=33571734 FTX investor Sequoia removed its glowing profile of Sam Bankman-Fried (businessinsider.com)

174 https://news.ycombinator.com/item?id=33575281 FTX held less than $1B in liquid assets against $9B in liabilities (ft.com)

139 https://news.ycombinator.com/item?id=33577311 FTX hacker identity discovered by Kraken Exchange team? (cryptoslate.com)

>> https://news.ycombinator.com/item?id=33577437 FTX balance sheet, revealed (ft.com)

^^ You are here ^^

And if you had an "FTX" alert on HN/Twitter, you'd have seen:

Sunday 11/06

1 https://news.ycombinator.com/item?id=33494404 Due to “recent revelation” Binance is liquidating their FTX Token holdings (twitter.com/cz_binance)

> Context:

Friday 11/04

254 https://news.ycombinator.com/item?id=33464494 Crypto trading firm Alameda Research might be insolvent (dirtybubblemedia.substack.com)

All in time for:

Tuesday 11/07 -> Monday 11/06 ("yesterday")

https://news.ycombinator.com/item?id=33518961#33520094

> I admit I did panic and tried to withdraw my funds yesterday. They just processed it today. A bit delayed but still processing.

"Get Out" vibes for sure.

> "Get Out" vibes for sure.

At that point it was too late.

If a significant number of customers tried to withdraw a few days earlier, FTX would have collapsed a few days earlier.

The mistake was made when giving FTX the money.

"What are President tokens? President tokens are ERC-20 tokens that will be redeemable for either $1 or $0 based on if Trump wins or loses the Presidential election. These markets act as tradeable prediction markets where the market price of TRUMPWIN should be roughly equal to the probability that Trump will win the election and the market price of TRUMPLOSE should be roughly equal to 1 minus that probability. TRUMPWIN and TRUMPLOSE are based on the President 2020 Futures Contracts on FTX."

jfc...

Someone just mint the Camacho coins already

Camacho was a good president. He knew he was out of his depth, sought the best advice he could and was willing to take politically difficult risks for the good of his people. Unlike, say....

That’s actually very useful. It’d allow one to hedge risks with new synthetic derivatives instead of creating weird proxies with stocks.

I, for one, do not like the trend of the financialization of everything. It is surveillance capitalism times 1000. Where all human behavior becomes an object to bet on.

-- dont have issue with the coin - "jfc smh" FTX was holding it - such a strange bet --

Wait will the forced liquidation crush a large part of crypto ?

Well… your anchors of eth and btc are down about 25% in the last few days. And their reported “assets” are huge chunks of the total market value for a lot of these tiny sketch coins. So yeah, I expect its going to be rough when this get liquidated or it simply turns out your counterparties are actually the sketchy exchanges who dont have anything to back it up.

There isn't much there to liquidate that still has any worth. They didn't have significant holdings of any of the major assets. That's kind of the main reason they were insolvent.

They also had this “hack” a day or two ago so it’s unclear what is left

Was he managing funds with a 10% fractional banking policy?

Nope. Was constantly telling users that funds were 100% backed.

Backed by liquidity or by assets? I thought the article said that 90% of the funds were liabilities

Exchange business models are supposed to be 100% different from banks.

If exchanges are using fractional reserves of any kind or amount, they have already committed fraud.

Also people are missing that banks having 10% reserves doesn't mean their assets are 10% of their liabilities

It means they have 10% of their deposits held as cash. The remaining 90+% is in liquid marketable securities (usually mortgages and other loans which are freely traded if they need the liquidity)

Also, when you transfer money from one bank to another, that other bank may buy the assets of your bank or it lends the reserves to your bank. When cash is withdrawn banks can still borrow reserves from the central bank.

That is kind of the whole point why we have central bank intermediation and why every country has adopted it.

Bank deposits, of course, are >100% backed (by a mix of assets), the 10% reserve ratio is just specifying a minimum amount of one kind of asset (central bank reserves). Most countries don’t have the same kind of explicit reserve requirement and most have plenty stable banking systems.

> Bank deposits, of course, are >100% backed (by a mix of assets),

The reserves are there to provide liquidity for people who want to withdraw their funds in normal times.

The assets are mostly loans. The lenders sometimes fail to repay the loan, and the collateral may not be worth as much as initially estimated.

The bank has capital requirements, so that if loans are not replayed, the bank shareholders take the hit.

If the capital is depleted beyond a certain point, the regulators (and the FDIC in the US) take over the bank, wipe out the shareholders, and install new management. Depositors are repayed up to the insured amount and if there are remaining funds they go to the insured depositors, creditors, and shareholders in that order.

That's of course how thing are supposed to be done. In reality, large connected banks are often bailed out.

What does it mean here that “the shareholders will take a hit?” Do the shareholders normally receive some regular payments that would stop (or be reduced) in that situation?

I know nothing about finance, but the stories unfolding this week have me interested to learn more about how all this works.

You can own a bank like any other business. Shareholders will get less dividends or stock buybacks.

The bank has deposits and capital from its shareholders.

The bank promises to pay the depositors interest, and the bank collects interest from the loans it makes.

If the bank made good loans, the difference between the interest it pays and the interest it collects increases the bank's capital, and at some point it may pay dividends to the shareholders.

If the bank made bad loans, and some of them are not repayed, the losses come out of the bank's capital.

If the capital goes below some regulatory threshold, a corrective action must be taken. The bank can raise more capital, or get acquired. If a corrective action is not taken, the FDIC takes over the bank, and either sells the bank, or closes it and distributes the remaining assets as follows:

First, to cover deposits up to the insured limit, which is $250K per account. Then to deposits above the insured limits, then to creditors according to seniority, and finally, if there's anything left, to shareholders.

In other words, shareholders takes the first hit, then creditors, then deposits above the insured limit, and finally deposits below the insured limit.

If the deposits below the insured limit take a hit, the FDIC covers that from its insurance fund.

This is of course a very simplified version.

Thank you for the explanation!

The system is so fragile that politicians and central bankers don't want to imagine the potential chain reaction that the failure of a big bank would result in. The only solution is to prevent banks from becoming too big in the first place and bigger banks should have more stringent reserve and capital requirements to discourage monopolization.

To what extent were responsible members of the financial industry hired to try to turn FTX into a legitimate financial company? Was everyone a "brilliant outsider", irreverent to hundreds of years of industry wisdom?

There should be a newcomer financial book titled "How to get rich quick if you don't mind being a crook".

The very first book to read before any other on finance and investment.

It would be the like of telling your kid "Beware of the wolf before sending her through the wood to pay a visit to Granny"...

They definitely lost money with Luna/UST. [1] I wonder if we'll ever find out how much they lost

[1] https://twitter.com/AlamedaTrabucco/status/15233819532395233...

Perhaps crypto-exchange could be transparent to third-parties through blockchain(s)? It should not be hard to declare all account numbers, so whole crypto-balance could be online validated.

Short bitcoin, long shitcoin... that's been a slow road to insolvency for most of a decade.

Unable to open the archived link, any alternative sources for the actual document?

The article links to https://d1e00ek4ebabms.cloudfront.net/production/7ab64a3b-6c...

Please post an URL to the excel file, thanks!

So... is this guy just a complete sociopath or something?

Telling everyone what regulations should be (and buying politicans) to ensure consumer protection while simultaneously sifting away 90% of consumer funds?

How does a person lie that much?

Well it seemed to have worked. The scam kept going until the math stopped working, it wasn't regulators or investigative journalists that brought it down.

Advising congress and buying formula 1 ads and sponsoring stadium names gave his scheme a certain unearned legitimacy.

The media is also culpable, because his face was always on it. I never used FTX, but I assumed that it was legit and regulated based upon his appearances on Bloomberg etc.

This seems to have been a case of XKCD 978, i.e. lazy journalists. https://xkcd.com/978/

Citogenesis is actually a Germanism stemming from "Zitogenese". [1]

[1] https://news.ycombinator.com/item?id=33581269

Today's media "journalists" follow whatever gets cameras and eyes on them.

He ran the inverse Theranos playbook.

Instead of a supremely polished persona, he hard-committed to the sweaty geek.

Confidence, man.

I once played poker in a Reno poker room. It was structured betting, not all in madness like on TV. I was probably 21 and sitting down with a mixed group, but mostly old timers. I was not new to poker, but I occasionally got the allowed bets wrong. I did really well that night. It could have been luck but I like to think I gamed them with my behavior, by pretending to be stupid. Like in a Guy-Ritchie movie plot twist kind of way.

-- apparently he was jacked to the hilt on adderall 24/7 --

It sure seemed like it in all his interviews. He can’t keep his leg still and always looked like he just came from an all night LAN party.

Also, the phrase “jacked to the hilt” just makes me giggle. I’ve always thought it was funny.

it's still the theranos playbook, it's just a different image projected. and it still serves the same role - tapping into SV narratives and preconceptions to create an image that is super appealing to investors, the media and employees in order to spin up the hype flywheel, and excuse inconsistencies and misbehaviour. fundamentally both still took advantage of contrasting their traditionally inscrutable fields to contrast their highly visible images and paper over any skepticism.

either way the failing is the same - investors failed to preform adequate due diligence and lent their credibility to things they didn't fully understand because they were distracted by the charisma of the founder and were worried that they would miss potentially outsized gains. as long as large amounts of capital keep flowing to private markets (especially VCs) this will continue happening

Well as michael burry said, its ludicrous to think asset bubbles cant be predicted. One of leading indicators is an increase in the frequency and complexity of fraud within the sector.

> it's still the theranos playbook, it's just a different image projected

You unfairly group all types of fraud together.

Fraud is a creative endeavor, diverse and fascinating.

He just wants to impress his girlfriend, who seems to have turned herself into a monster by doing enough amphetamines to replace the contents of her brain with Slate Star Codex.

https://twitter.com/0xhonky/status/1591630071915483136

https://twitter.com/autismcapital/status/1591601671943393280

(From the first tweet, it doesn’t seem like anyone in the conversation has read https://en.wikipedia.org/wiki/Martingale_(probability_theory...)

Hopefully out of all this debacle that rationalist community will be brought down a peg or two (including kumbaya pie in the sky stuff like Effective Altruism).

It was all funny when these people were portrayed in TV shows, not so funny when that mindset is behind billions of dollars of people's money getting defrauded.

Remember at the peak how many pro-crypto HN commenters would give all kinds of tech/politics/economic pros of crypto. It was all a sham. Anyone who knows tech and seen the progress from the 90s could smell the shit that is crypto. Unnecessarily difficult than it had to be, to obfuscate the fact it was bullocks through and through.

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