FTX fiasco sparks billions of dollars of outflows from exchanges
bloomberg.com
bloomberg.com
What's even more impressive is how quickly the crypto community is speed-running the history of financial fraud from penny stocks to bank runs. From Wikipedia,
> Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.[14] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York.[15] They chose Richard Whitney, vice president of the Exchange, to act on their behalf.[citation needed]
> With the bankers' financial resources behind him, Whitney placed a bid to purchase 25,000 shares of U.S. Steel at $205 per share, a price well above the current market.[16] As traders watched, Whitney then placed similar bids on other "blue chip" stocks.
> On October 28, "Black Monday",[17] more investors facing margin calls decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 12.82%.[12]
> On October 29, 1929, "Black Tuesday" hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors. The panic selling reached its peak with some stocks having no buyers at any price.[18] The Dow lost an additional 30.57 points, or 11.73%, for a total drop of 68.90 points, or 23.05% in two days.[19][20][21][22]
...
> Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market.[49]
> In 1930, 1,352 banks held more than $853 million in deposits; in 1931, one year later, 2,294 banks failed with nearly $1.7 billion in deposits
Does any of this sound familiar?
The decentralized aspects of crypto ("defi") has been operating just fine through this entire shit-show.
https://beincrypto.com/top-ten-defi-hacks-2022-hackers-darin...
Most of those examples you linked are bridges that aren't considered Defi or half-baked protocols that scream "scam".
Systems that are robust due to being simple, flexible, highly independent tend to peter out over the long haul, as their failure is often an effect of a changing environment rather than some internal fracture.
Anything that's made "robust" artificially (like propping up a bridge with a loose piece of lumber, or injecting bailout money to maintain bank's solvency) is now completely dependant on that artificial prop. if the bridge is allowed to carry more traffic after being propped up this way, you can expect a catastrophe equal to the one you averted + everything that's been added since.
There's a reason that exchanges like FTX are central to "crypto" as a practical matter, regardless of the technical underpinnings of crypto itself. These things are required to facilitate speculation and attract users who otherwise would be capable of interacting with the actual distributed stuff.
Without the much needed fiat currency of this class of users, the pyramids couldn't have been built nearly so high.
There were massive 'defi' failures earlier this year. FTX itself appears to have been primarily invested in varrious defi schemes while being short Bitcoin, resulting in the current insolvency.
A bank run can only happen with fractional reserve system. An exchange that keeps a 1:1 ratio of assets is not exposed to a bank run. Fiat banks on the other hand are by definition exposed to it.
Is it intrinsic to digital currency that it be in an exchange, and convertible to dollars?
But it didn't go that way. If you want to trade/spend something that is in increments of tens of thousands of dollars, you have to have an exchange. Where all of the fraud, panic and crime happened. Because it was decentralized (no supervisory authority)
> Does any of this sound familiar?
Why did you remove the "citation needed" part of that latter quote? There is no source for that claim, and you removed that piece of information.
This [1] (with ample sources) claims there were over 24,000 banks at the start, 8000 in the Federal Reserve System, 16,000 not in.
This [2] claims total losses from banks, over a wider period than your list (and including two sets of bank runs [1] and [3]), were $1.3B (again with decent sources).
There's a reason things get tagged on Wikipedia as "citation needed". It's important not to delete those from a quote.
[1] https://www.federalreservehistory.org/essays/banking-panics-...
[2] https://www.fdic.gov/about/history/timeline/1930s.html
[3] https://www.federalreservehistory.org/essays/banking-panics-...
You should not keep cryptocurrencies on an exchange.
We have been saying this since the early 2010s. Ten years, minimum.
This is exactly the point of cryptocurrency.
If you're not doing that, you're messing about with IOUs.
Their capital is there because they use instantaneous electronic trading venues to make money.
Most of them would rather trade on swap than have to settle in cash. And they couldnt give a shit if they're trading Bitcoin or magic beans. They don't care about the Blockchain.
Want to buy a Ferrari? Buy a Ferrari. Not a photo of one, not an "NFT", not red paint and some axles, and not a promise that someone has it in their garage - the real thing.
IOUs are the entire problem cryptocurrencies aim to solve. You can trade without giving a third party full access to your funds.
Hedge funds should _demand_ this.
What you're suggesting just doesn't fly.
This is why the regulated markets brokers have to stump up collateral and we have clearing houses. You can buy Facebook shares in a microsecond but it takes days to settle and become yours. During that time, you're at risk. Likewise with crypto, even if you settled every few hours on the Blockchain (hideously expensive), there is still a risk window.
Treating crypto like a high velocity stock exchange gets you exactly the same thing that you get from a high velocity stock exchange; aka a system that just generally screws little guys.
The "little guy" enjoys very low commissions and market orders with bid/ask spreads less than they ever were. Market makers are happy to give cheap liquidity to "uninformed" traders whose trades don't move markets. (People on Robinhood get very good access if they want to trade sensibly; I wouldn't blame the market makers primarily that many of them use stock trading as a substitute for sports betting.)
If you like trading limit orders on the theory that odds are very good you can set a limit 1% below the current price and get a fill thanks to Brownian motion, they are going to outtrade you because they've got answers to the risk that a limit order sometimes fills not because of Brownian motion but because the market is moving sharply in one direction and you don't.
Market makers do not want to trade with large traders who know something that not everybody knows and whose trades may be a harbinger of market moves that will go against the market makers. Market makers want to make those traders pay through the nose for liquidity and that is why large trainers are always complaining that "the prices I see aren't for real."
If you want to park your car on the side of a free flowing motorway you are at risk. You can do it, but it's dangerous. People get hit all of the time. It might be more convenient to check your map. It might be faster. But you really probably should get off at the next exit or find a rest area and take that theoretical efficiency hit, cause it works most of the time until it doesn't.
This is a demonstration of that risk. It's not the first, likely it isn't even the 100th.
You can't trade anything with 10 microsecond timing without accepting counterparty risk.
Crypto is not special here, except that it's full of fraudsters or people that think they're smarter than they are.
In their mind crypto should be the antidote to counterparty risk and they are willing to give up liquidity to achieve that.
I sent a decent chunk earlier for (allegedly) only $0.75. I agree with your timeframe argument, but the price of these transactions aren’t always that bad.
Yes but it's also got serious "this is the year of the Linux desktop" vibes. If there's one thing exchanges and this collapse have proven it's that normies could not care less about managing their own keys because, and this is true, managing your own keys at home is risky and sucks - intentionally.
Saying that everyone should have a birdbath with a Ledger under it is tantamount to admitting this whole model is only for a few anarchocaptialist libertarian nutbags, los narcostrafficantes and folks trying to make ransomware payments - while the normies should just stick to tradfi.
If it somehow became more like Windows I would use an alternative.
[1] https://en.wikipedia.org/wiki/Usage_share_of_operating_syste...
This is not the point for a lot of users for which crypto is synonymous with trading tokens on an exchange.
If you have any money on the exchanges now is the time to get out.
144 mil on an ICO off the bat is not ridiculous? Whatever its technical merits are, if Polkadot skyrocketed more than other altcoins (10x in 15 months) the reason was probably due to the cult of personality around Gavin Wood. If you're "a co-founder of Ethereum" in a crypto boom, you're probably riding the wave at the top.
Just saying that Polkadot actually works, true it could be super centralised that way I’m not sure about it’s history. But the Kusama / Polkadot combo has delivered, its not a memecoin with no utility.
And of course there’s always Tezos, which has imo the only organic NFT market out there.
People mistakenly believe that the two option you have are valuable or zero. Instead it is a scale from positive to negative value.
For example a legislation to have bitcoin "pay for" the environment damage could lead to it having a negative value.
Working with and spending effort on a coin that goes to zero is a loss of productivity and opportunity of not doing something useful. Again the real cost is non-zero.
I'll bite. So basically, owner would have to pay more than they would get to sell their Bitcoin? I'm sure nobody would do that, so the price is effectively capped at zero and can't go lower.
Lol this is beyond absurd.
Bitcoin has a cost, as well. The undercover economist might tell you that it fails to charge for an externality, namely its climate impact.
It's entirely possible that, were that exernality priced in, the cost to operate bitcoin might exceed the value it provides relative to other providers, which would give it net negative value.
In the case where the costs are larger than the value produced, but are not paid by the bitcoin system (external, you might say), then it would still have net negative value, but continue to operate.
But for whom? What how much is that utility really worth? And what kind of utility? That is what keeps shifting and what all the pro-contra propaganda is about.
In fact the bitcoin could even have negative utility, where getting someone stuck holding bitcoin is good for someone else.
Imagine that ... not just that bitcoin goes to zero, but could go into negative even!
1. Mine a bunch of new hashes.
2. Fake liquidity by selling to yourself - bonus points if you make it appear that the price is rising by selling/buying for more $.
3. When naive folks shout "it's raising to the moon!" and buy the crap - drop all what you have from the step one.
4. Profit - Lambo is yours!
Normally I would have sympathy but if you post on HN then I have trouble taking it seriously that you can’t figure this out. How could it possibly be any more obvious?
I'm sorry but you lost me here. If I stall my BTC's in a wallet on an exchange, they remain BTC's?
Also I have a feeling that you're not getting my point. It is the selling/buying of BTC's for USD at the BTC exchanges that determines the official BTC/USD rate. Sure you can also exchange them for something else (if the exchange lets you), but this will not affect the BTC/USD rate.
So if on an your exchange you're unable to withdraw your BTC's, you can't sell them, which means you're unable to affect the BTC/USD rate: I.E. BTC price will not go down.
There is a huge subset of bitcoin TrueBelievers™ who regularly buy bitcoin with their local fiat with no intent of ever selling it back for fiat, but instead wait and invest elsewhere in expanding the network of people and institutions who will accept it directly for goods and services, e.g. El Salvador.
Most of these people are ready for a very long winter and a longer game on the order of decades.
If everyone kept their own wallets, bitcoins value would tank to pre-2017 numbers.
The point is, I never need to buy fiat (what you call withdrawing)
And where are you that most counterparties accept BTC? El Salvador?
No, last week was the time to get out. By the time everyone knows it's time to get out, it's already to late.
ii) that's not how these exchanges work. if they are non-fraudulent, they'd have to hold cryptocurrency and cash on behalf of their clients. they'd never have a problem meeting withdrawal requests (the critical element of bank runs)
iii) crypto exchanges, if they are non-fraudulent, would be an equivalent to stock brokers, not banks
[0] https://www.imf.org/en/Publications/WP/Issues/2019/12/20/Mon...
Your points about "that's not how these exchanges work" is just a rephrasing of the point I made where the assets were loaned out illegally.
I honestly don't know how one can argue against that, it is simply true to anyone who has used a bank. I did not make any larger statement about the mechanics of modern-day money creation.
If a bank makes a lot loans, and those loans go bad, and then depositors are fearful for their money and make a run on the bank, it is the depositors who are still shit out of luck unless their deposits are insured. You can argue all you want that the traditional model of fractional reserve banking isn't how today's money creation works, but at the end of the day there is a direct line between the quality of a bank's assets (its loans) and the ability for it to service its liabilities (its deposits).
Considering that FTX is a fraudulent exchange and the rate at which fraud has been perpetuated by crypto exchanges historically, I don't know that this is any more than theoretical pedantry.
For all practical purposes at this point in time, if you don't assume your exchange is lying about their reserves and at high risk of a run you're in for a massive loss.
I am heavily against crypto, but I will be the first to point out the decentralization purists were right: not your keys, not your coins. If you're going to play this game, putting complete trust in mostly unregulated entities who have conflicting self-interests from you...yikes.
I'm a cryptocurrency advocate and I agree. This is why users should 1) never put more funds at risk in an exchange than they are willing to lose (at least, not at the same time), and 2) should demand Merkle-tree based proofs of crypto reserves, like the Kraken exchange has done out of their own initiative, or some other kind of proof of crypto reserves by cryptographic signature and 3) should demand periodic financial audits of their exchanges from reputable financial auditing firms (not the clown show that FTX's financial auditor was, which had offices... IN THE METAVERSE).
Points 2) and 3) are not infallible (especially because exchanges can get hacked) which is why point 1) is so important.
I also think that crypto exchanges should require new customers to pass a relatively strict test about crypto, investment and trading basics, before they could start operating with cryptocurrencies or with any other such trading products. Especially since crypto exchanges are the most common onboarding vector for new crypto users.
Because it's obvious that many crypto users do not know what they're getting into and all the risks that they are taking.
> I am heavily against crypto, but I will be the first to point out the decentralization purists were right: not your keys, not your coins. If you're going to play this game, putting complete trust in mostly unregulated entities who have conflicting self-interests from you...yikes.
Agreed, although I would nitpick in that by itself, regulation is hardly a guarantee that the risks have been eliminated. In fact, many bank failures and financial crisis, for example, have happened despite massive regulations. Also, many regulations are pointless burocracies or even have massively detrimental and/or have unintended consequences in many ways, such as limiting competition unnecessarily, promoting inequality and unfairness by preventing savvy investors (with non-massive amounts of funds) from being able to invest, etc, etc, etc.
But yes, in general I agree with you and I think more transparency for crypto exchanges is definitely needed and maybe should even be required by regulation, given that most exchanges are not doing it themselves out of their own initiative (even though it would be in their collective best interests in the long term).
These aren't anything though, they're made up by the founders. They don't behave like any typical financial institution. These things are just implementations of functionality, the fact that they are trusted with large amounts of money by random people on the internet is really good marketing and promises of riches.
These events are the closest we can get to bank runs today
I get it that if you want to exchange and play with the markets you need to have your crypto in a shared wallet, but why for f** shake would you put all your money there?
That’s the whole point with crypto, you don’t need a bank (exchange) to store them for you. Not your keys, not your coins :-)
Crypto is full of people looking for to get rich quick with interest rates that are obvious ponzi schemes and/or by taking on insane leverage. They don't want to just put tokens in an offline wallet and watch the market prices.
On a similar (sort of) principle, I do not keep 100% savings on the bank account to which my ATM card is attached, I have a separate account where I keep most of my savings and move money between them once a month or when i need to buy something very expensive.
For what chain? As far as I can tell, this is only true for ETH, and you can mitigate this by switching to a true L2, although not many of them are up to par yet.
https://twitter.com/haydenzadams/status/1592188164218707969?...
How often for stocks purchased via a broker do you go and reregister them to direct registration so the certificates are in your name?
At this point I’m beginning to think the “not your keys” group is arguing in bad faith every time an exchange fails for failing to see why a retail investor would prefer an exchange.
The issue is that exchanges are pretty much guaranteed to be frauds, by market dynamics. There are only a few routes to profit, 1) charge users or 2) use user's funds to trade, or 3) trade against the user but with more knowledge. One of those is limited to maybe $20 per year, the other two are crimes. Every single crypto exchange picked one or both of the crime strategies because it was the way to make an exchange wildly profitable.
People who did use exchanges are people who were doing things they were warned were not a good idea, and were doing it for the obviously unrealistic gains and imho would have simply mailed their money to a Ponzi scam if that was all that was available.
Everything has some weakness and crypto is like cash here - if you let someone hold onto it for even a second they can refuse to return it.
I don't think you can blame a community of honest developers who described and detailed the risks for intentionally self-deluding investors. A 100%+ yearly return is a better indicator of something wrong than of a great untapped opportunity and these investors tried betting against people who they were assured were scammers and when that failed they blame the currency. It's like trying to win a rigged game against a carnie and then blaming the bus driver who gave you a ride to the carnival.
If all you’ve done is reinvent the existing monetary system minus all regulation, oversight and value, you’ve invented absolutely nothing at all.
Except, perhaps, a novel new way to convince rubes to give you their money.
Should have been a red flag on reflection
Then the second wave was technical adjacent people. Most of the "investors" I knew they were less technical people but still in the startup scene. Most of them didn't really understand how cryptocurrencies worked, but weren't completely clueless. They still had to figure out how to create a wallet, acquire coins etc but could only give you a hand wavy understanding of how various currencies actually worked.
This current wave was the naive retail wave, where large masses of people who fundamentally do not understand the underlying technology started getting involved. Most of these people in earnest do not understand what a "wallet" is, have no idea how to use crypto currencies outside of a central exchange. All they know is "a lot of people seem to be making easy money off this".
This is precisely why so many of the loudest critics in this current wave where crypto enthusiasts in the first wave. It became increasingly clear to anyone with technical understanding of the topic that the only explanation for what we're seeing is a lot of the very financial corruption and scams they were hoping to fight in the first wave.
I've said this before here on HN, but I think crypto exchanges should require new customers to pass a relatively strict test about crypto, investment and trading basics before they could start operating with cryptocurrencies or other such trading products.
I think crypto exchanges are an ideal platform to do this because they're usually the onboarding ramp for most new crypto users, especially the ones losing massive amounts of money recently.
I believe this would be in the best interest of the whole crypto industry and could be a massive improvement in the reputation and usage of crypto in the long term, even if it could have some detrimental effects in the short run (due to being an entry barrier for new users).
Because it's obvious to anyone not asleep at the wheel that many new crypto users do not know what they're getting into, or rather, all the risks that they are undertaking when they get their money into crypto exchanges, cryptocurrencies and/or crypto-related... thingies.
One or another variation of this story has played out many times already. Then the whole sand castle crumbles, and a lot of fake money gets wiped away.
The entire cryptocurrency space is just an unregulated gambling arena. There may be some solid, well-intentioned efforts within it, but they are completely overshadowed (and overcapitalized) by the purely insane gambling ones.
As long as the exchange is not loaning or collateralizing against these SHIB holdings, then it's nothing of concern. It does still paint a pretty bad picture of the exchange or its customers based on the huge percentage of "value" stored in a coin which has absolutely no point in even existing (but that's beside the point of my original inaccurate post).
It just paints a bad picture of the customers. If that is what CDC users wanna buy, then the exchange needs to have enough to support the liquidity needs of their customers. CDC might be doing a lot wrong, but that probably isn't one. Wish you would edit your comment now that you understood the context of your assumption.
SBF & his polycule cohorts are probably going to spend decades in prison.
What astounds me is the lack of oversight from investors (regulation can be slow to catch up). The company literally has no CFO [1] and its books are prepared by a Metaverse accounting firm [2]. While I have sympathy for the customers who will bear huge losses from this. I have absolutely none fodr the investors.
[1]: https://www.ledgerinsights.com/ftx-warning-signs-no-cfo/
[2]: https://www.coindesk.com/business/2022/11/11/meet-the-metave...
Now you might consider that ethical (eg in totalitarian regimes). I make no judgement about that. But the fact remains the use case is avoiding the law and that has negative implications too (eg ransomware, funding various illegal activities).
and there are plenty of failings of the security of various centralized information storage and processing systems as we have seen; they can become vulnerable to attacks by bad actors. some of those bad actors are trying to target specific people to harass, stalk, or otherwise harm them. you're not going to convince me that blanket surveillance of all financial activity is remotely optimal from a safety standpoint. and we have obvious human rights questions about mandated surveillance of financial activity. so, no, just because someone is in government does not mean i trust them not to abuse the immense power they've legislated for themselves. i can be doing absolutely nothing illegal and argue for the legitimacy of taxation and AML controls while still holding the above views about human rights, and for good reason.
For legal money transfers you'll have a hard time beating that. For illegal ones you're, well, illegal.
But that’s not because of transmission times (updating a database is faster than a blockchain), it’s because they get a better price for currency by batching you up with other people.
This kind of shift is more like a social movement but VCs don't fund education and organizing (hallmarks of societal shifts), they fund growth (if not for a single company then for a sector).
So crypto should really be more hobbyist than mainstream right now (which is what I think I hear crypto enthusiasts screaming about amidst all the fallout).
But the current reality shows us that crypto-as-a-hobby market would not be big enough to realize the crypto-as-a-new-paradigm vision, hence the celeb endorsements and positioning value propositions against centralized banking features to raise the money/interest needed to build out the vision.
It's the standard startup journey, except that marketing for growth/adoption naturally places the business at odds with the ideals of the technology.
Just my two cents!
It can be dangerous when it happens, alas the accumulation of greed/bullshit and delusions is calling for it.
Winter is coming.
For some reason I tend to rejoice when I see bullshit finally exposed, but I sincerely hope this one won't last too long.
There is a lot of wealth and money being destroyed. These assets were pledged. People made spending and savings decisions with them in mind [1].
In a farcical way, crypto is doing a good deal to alleviating the pain of monetary tightening by concentrating it on its holders.
Sketchy foreign crypto companies explode all the time. This one is more exciting and salacious because it seems like prominent investors, US regulators and politicians bought the lie (and the whole c-level polycule thing). The rest of the crypto ecosystem will continue marching on.
I think it's likely this is the cycle bottom: doom and gloom feels like its probably a local maximum. I predict history will repeat itself: BTC price will be boring for another two years until the run-up to block halving in 2024.
If you want to own crypto, now's probably a good time to set up DCA. My personal advice to friends is to DCA (buy fixed dollar value each ~month) on Coinbase (least sketchy exchange) until 1% of your net worth is in BTC and ETH (2:1 ratio). Pull any accumulated funds off the exchange to coldwallet quarterly. DCA out when it exceeds 5%.
This isn't just about how far the contagion has spread via counterparty risk. And that is a significant factor. Leverage is widespread and undocumented. This is also about an awakening to the risks associated with hosting your "wealth" in custodial wallets controlled by completely unregulated entities. Entities that have continually failed to achieve even a modicum of transparency (all stablecoins, most exchanges). Entities that in some cases refuse to identify a headquarters (Binance). In other words, this is an ongoing macro trust rug.
If you're being "awakened" now, you've not just been asleep, you've been sedated...
But for the majority of participants today (aka dumb money retail), this is their first experience in getting rekt. Many of them will likely wash their hands of the entire space.
I am not sure if most people will have enough patience though!
Then we start again with a new generation.
Or take a look at the EA community and their cognitive dissonance over SBF and the general issue of bootlicking billionaires when it comes to altruism. Not everything is rational now.
Or you’re right and it’s wash trading keeping the price afloat.
https://cryptobriefing.com/metamask-opensea-blocks-expose-ce...
I don't know anything about how it worked or who used it, etc. I wonder if it relates somehow to this idea of wrapped securities though.
Sounds like it was to allow people to move funds from crypto into US stocks. If that was the case and that business also went bankrupt then I think people lose whatever stocks they "bought" via FTX Stocks because they likely just tracked prices and made it look like people "owned" a security by updating a record that says they bought it.
If there were huge numbers of purchases of stocks through FTX by their customers but then FTX didn't actually purchase those stocks (like the recent findings that they didn't actually purchase the crypto) then I don't see how this makes any bit of difference to whatever stocks are in question. Its not like they were ever actually purchased and FTX is in bankruptcy so any FTX customers are left with legal avenues to get money back but it appears there's no money to get.
Compushare got yall so hard, lmao.