FTX Contagion | Hacker News Reader

FTX Contagion

mollywhite.net

303 pointsKoftaBob231 comments

Maybe someone can help illuminate a nagging question I've had for quite sometime around this whole FTX debacle:

Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives!

I look at the list of institutional investors, from the "big boys" in the VC game, to pension funds and I can't for the life of me believe the current narrative that every level of due diligence checks seemed to fail in this single edge case.

From a systems perspective this doesn't make me think "oh what a crazy one off, people must have been sleeping at the wheel", this makes me think "this isn't a bug, this is a feature."

So the real question is, how many more proverbial rotten apples are in the basket of VC?

My friend had his funding rejected because during the DD the cto did not pickup the phone from a strange number. they wanted to speak privatly to him.

I once had an investor who I thought was a great fit for both me and the business. We clicked on every level. We shared the same goals, philosophy, way of thinking about things. I loved him.

A few days before making his decision, he called me at 11pm. I knew exactly what was happening. If I didn't pick up, he probably would think I'm a 9-5'er (which I'm not).

If I did, I would probably be getting into a long-term relationship with a guy who considered him more important than my family. He'd probably want me jumping on planes at the last second to show him slides, mentoring his other founders, etc.

This wasn't my first deal. I was successful. I decided to not pick up.

The deal fell through, predictably. But I couldn't be happier with my decision.

I share the nagging question! The only thing I can think of is that he was "making money" quickly, showing his skills as a trader. This...greed...might have been blinding to the investors.

Where angel Investors or VC will gamble with an unknown founder and their untried product, SBF was making money and the product seemed too good to fail?

at least part of the answer is that SBF consciously designed his fundraising process (entering ratcheting commitments with an extremely short time frame) to cause FOMO and waive due diligence

the other is the emperor's new clothes effect

It appears that the infamous due diligence process is mostly theatre.

- for the LPs to believe that their money is handled by serious/smart/accountable people - for the founders to bend over

There is a lot of "storytelling" in the VC business that should be more thoroughly and critically explored by journalists.

When I sold my smallish venture a year back I got around 400 due diligence questions. I answered them, put the material together.

From questions later on it became pretty obvious not one person, not the legal or operations team of the acquirer had look at anything I'd handed over.

I think this is a mixture of laziness and also that these due diligences are done for legal liability reasons, i.e. you can look at the materials if there ever is a lawsuit, not before.

But this is just an anecdote, this obviously depends on the acquirer, I'm sure plenty of companies do it properly.

There is enough due diligence to cover ass. I think what surprises people is that peoples asses were actually covered. What exactly did e.g. Sequoia see to give them confidence that there would not be significant cost if things went sideways? I guess you can always say its not illegal to invest poorly. But is it illegal to fund a house of cards where your position is to get a good deal on the inside of a potentially lucrative ponzi scheme? I think the whole thing is a good lesson for common (especially young) investors... care about and think in the longterm ... what is your nest-egg invested in? If things go sideways there's not great guarantees of which groups receive a prop-up and which are allowed to fall.

How many of these VCs used their reputations to pump shit coins (which they got along with equity when they invested in these Ponzis) then sold the shit coins to retail investors?

Seems like they sold unregulated securities

As you suggest, I'm not sure how typical that is, and it would very much depend on the acquirer. We've made quite a few acquisitions over the years, and there have been other potential acquisitions where we've chosen not to proceed due to something that's come out during DD. That's not to say we've never had any mess to clean up post-acqusition, but it's always been mess that we were aware of either through early conversations or through the DD process.

Acquisition due diligence is not the same as funding due diligence. There are definitely differences in the two and different reasons for doing it. For acquisition, due diligence is part of the legal and compliance requirements. For VC, due diligence is supposed to be part of the deal vetting process, but it's usually a headache for everyone, and goes out the window when they want to move fast.

Bacon & eggs. The chicken is involved but the pig is committed.

https://en.wikipedia.org/wiki/The_Chicken_and_the_Pig

Yeah, in the case of an acquisition, the acquirer can acquire all sorts of unsavory things – liability, debt, contractual obligations, lawsuits, etc that could potentially harm the acquirer.

In the case of funding, the worst possible outcome is that they write off the investment, like in the case of Sequoia and FTX.

Doesn’t collecting the material but not looking at it actually create risk and liability rather than reducing? For example, take the extreme that you answered one of the questions with admitting to selling to a sanctioned country. Well, they knew about it and have record of knowing about it but acquired anyway because they never looked at the materials.

Yes. If you get sued as a company for e.g. negligence, and it's pretty clear you're not going to win by attacking the point directly, the two go-to arguments are:

1. I did not know, and whilst I have a duty to know, in this case I was intentionally misled by others and couldn't have possibly known: I _did_ do my DD on asking for this information, however, I was lied to.

2. Okay, you got me, you win your case. Now I go sue the seller for having failed to disclose and making them pay me the same amount as I have to pay you.

Both of which are severely hampered by not reading the DD. At best you could say that by not doing the DD at all, you insta-lose on the first point (you have a duty to ask, if you can't show that you asked, you lose immediately). However, given that you now received it, it seems like a significant misunderstanding of the situation if you then don't get some intern to read it and highlight dubious lines and cross check a few things.

It's possible this is just the same shit moneyball is about: Lawyers putting a lot of stock in looking around and seeing what the rest of the lawyer clan does, and not using the brain whatsoever, trusting _entirely_ on the gut instinct of 'yes, this feels familiar and it is what we all always do, therefore, surely it must be fine'.

Case in point: Email footers claiming 'if you aren't the intended recipient, you must delete it; all this stuff is confidential' are fucking retarded. Obviously it's not legally binding (if it was, I can wrap a note 'you indemnify me by receiving this object' around a brick and throw it through your window!), it looks stupid if it's at the bottom of e.g. a press release you mailed to a newspaper, 'not the intended recipient' is not something you could possibly prove (hey, you mailed it to me, therefore I am the intended recipient), and by not suing those in evident breach of your clause, you establish that you don't enforce it. If you then attempt to sue somebody for disclosing actually private information that was clearly under NDA or whatnot, they can make a plausible defense in court that you never sue anybody for it and that therefore this is just picking and choosing, which has some legal legs.

And yet _every lawyer office and almost all businesses with a legal team_ does this, as do many companies with nothing like it (presumably, those'd be cargo culting, the legal companies / companies with legal teams are actively lemmings jumping off the cliff to follow their pals).

Possibly they do it because they know others expect them to, but I find it dubious that it's a good idea to actively do stupid shit just because people _think_ it's smart. It's not like having a footer makes you stand out these days. On the contrary.

) Yes, disney movie, lemmings don't actually do that. Which makes these companies even dumber, no?

> Obviously it’s not legally binding

Obvious to you, but not quite factually correct. This is, of course, not an attempt to form a contract or NDA (which would be ridiculous) but instead, an attempt to put a certain kind of recipient in notice.

Lawyers operate under ethical rules which differ slightly state-to-state but are largely based on the ABA model rules of professional conduct. Check out Rule 4.4:

“A lawyer who receives a document… and knows or reasonably should know that the document… was inadvertently sent shall promptly notify the sender.”

The standard footer is part of making sure the recipient “reasonably should know” that a document not intended for him is not intended for him.

Now, obviously, this warning is not binding on you in any significant way, but it likely has some effect on your lawyer, assuming he is licensed in a state that puts such a responsibility on him.

Your conclusion about the legal effect of the brick thrown through a window is probably correct, however.

> Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives!

I’ve seen two groups of founders here. One knows how to say the right things, spin data the right way, have the right credentials, and know the right people, to avoid substantive due diligence. The others don’t, and end up getting a colonoscopy and then likely a “you’re too early” or “you’re too far along”.

> So the real question is, how many more proverbial rotten apples are in the basket of VC?

I don’t have a bird’s eye view, but my few data point me towards most VCs convincing themselves that they’re rigorous, when they ultimately rely on subjective criteria and so are quite vulnerable to con artist founders who know how to make them feel good.

This is why standardized processes and adherence to them is absolutely critical for risk management.

There is always going to be a situation where there's substantial political / personal pressure to skip checks, sometimes from the CEO themselves.

Good processes are built to hold the line even when literally everyone is urging everyone else to bypass them. Which is really hard.

VCs with rigorous process get out-competed by the ones that jumped at garbage companies that racked up huge valuations and then cashed out. VC isn't about making good companies, it's about cashing out. There's no value in the business actually being good, only in it being hyped up.

Due diligence is for the founders and startups that the VCs aren't that excited about. When the VCs really want something, due diligence, especially the sort you mention, and any sort of business plan / model / etc goes out the window. They'll fall over themselves to get a piece of the action in some hot company in some hot market, even if the founders are total jerks, the company has no real business plan or model, and the long term plans are vague. The startup funding game is all about investing in startups as a financial asset, not in startups as a sustainable business. VCs will put you through the "you need traction" "you need a business plan" "we need lots of due diligence" if they aren't that into you or you're an option vs. an opportunity. Venture capital is a hustle, and you have to know how to play the game. Most startup founders play VC as if they're going to a bank and getting a loan and have to justify everything, when VC investing is really about pattern matching and lots of gut reactions, and VCs are investing in what they believe is a chunk of something that will be worth more in the future. The actual business and startup founders are only the side part of that hustle.

> When the VCs really want something, due diligence, especially the sort you mention, and any sort of business plan / model / etc goes out the window.

Indeed. Post FTX, Sequoia not only scrubbed the hagiography of SBF from their site, they also scrubbed a story about how they went from meeting to funding company in 48 hours. Not sure how much due diligence you can do in that time frame.

Oh Sequoia. The company that put $41M in a single seed round into a company that did... nothing: https://www.businessinsider.com/how-the--did-color-raise-a-c...

Hmm, the article seems to suggest that perhaps Bain put up the majority of that round.

The update in that article said:

"Update: CNET's Caroline McCarthy tweets at us: "Sounds like a good theory, except that a Color exec told me Sequoia's $$ was nearly triple Bain's." So we're back to: HOW DID THIS HAPPEN?"

So Sequoia put in nearly triple what Bain put in. The article was just guessing before the update.

This sounds right. Theranos is a case example - if the investors had hired any independent experts in the technology sector, micro-fluidics for biochemical analysis, they'd have immediately told them that quantitative measurements (i.e. getting blood metabolite levels) at that scale were essentially impossible, although +/- testing (i.e. detection of a virus, or a gene sequence) was more plausible.

Restricting Theranos to +/- testing (STDs and other infectious diseases, maybe some cancer genes) would be FAR less profitable than taking over the blood testing industry, which is probably why Theranos didn't go in that direction. Regardless, even cursory due diligence would have revealed all that.

> if the investors had hired any independent experts

Maybe they did? The ones that actually did invest are the ones that also are waiting for a Nigerian prince to finally do his bank transfer.

That would be like the opposite of survivor bias. We never hear the boring stories of the diligent people who avoided disaster.

I've read a lot about the Theranos situation, and it sounds like CVS might be the "survivor" in this case. There are a few references to CVS in Bad Blood and other reports, but CVS wisely didn't say much about what caused them to pass on the offer that Walgreens accepted.

That's a perfect example.

I can think of two incentives for the vigilant to stay silent in the face of a scam.

One, in the case of a company especially, they may want their competitors to walk into the trap.

Two, the risk of accusing somebody of being a scammer (that you haven't fallen for) is too great, you get nothing out of it, and risk being sued.

Although, in this case, where peoples' health was put at risk, it would be especially awful to not speak up.

Can you suggest things I can read to understand this phenomena better?

This video probably sums it up best: https://piped.video/watch?v=N6Zz-Nkkaxc

Lmao, thank you for making my Saturday morning!

When people are greedy they forgo due diligence. It is how Ponzi scheme always seem to work.

And if any one of you here think you are not greedy, please, take a deeper and more honest look at yourself.

The answer is probably that VCs aren't looking for what you think they should be looking for.

And technically you could say FTX was a good investment if you got out before the collapse.

The only way to get out of your investment with FTX in time would be if you had negotiated some clause to that effect in your funding round (like warrants/put options on the shares), which no one seems to have done, and which SBF is unlikely to have accepted.

There’s a difference: no seed investors. Alameda was already operating, funded by cash (supposedly?) made from a kind of carry trade on some restricted cryptocurrencies. So ppl were putting money into an already operating business.

There’s still no excuse for zero diligence, much less zero oversight (they couldn’t even produce a balance sheet??). But the situations aren’t parallel.

VCs were already bullish on crypto, and Alameda was already printing money. They thought there was less risk than there was and any delay would let other VCs get in on their spot.

Go read the infamous Sequoia Capital article and despair at the fact that these wildly wealthy people who comprise the investor class and wield inordinate, unimaginable amounts of unilateral power are just as stupid as the rest of us.

SBF article? It made me wonder if they're stupider, they were too eager to buy into the 'Genius Great Man' trope.

Really? Y Combinator is famous for its lack of due diligence, and making decisions based on a web form submitted to get to inperson interviews and then a 10 minute meeting to make an investment.

And the biggest VC's of the past few years, Tiger Global and SoftBank did almost no diligence.

The other big VC's in AZ and Sequoia are also known for moving very quickly and not being very onerous with their due diligence.

I guess it could be that most of the VC stories you have heard are from 2nd and 3rd tier VC's who have to be far more thorough?

The lack of DD in YC I believe is due to them being Angel/A series basically (not sure if the classification even stands here, they're an incubator)

You do want more DD to invest in bigger companies

Check out the NS8 story. They were audited by one of the big firms and still passed and got funding when it was a fraud. Lightspeed was the lead VC. Maybe they are moving a little too fast.

The part of the story I am curious about is that I know in some cases VCs got issues some tokens along with their shares. There is the possibility that they knew they would get enough tokens and be able to dump them to make the deal make sense because the tokens could be instant profit. They say, we lost $x m investment. (PS: the fund is up, we sold $x+y coins)

Or it could have just been FOMO.

I feel sorry for the Ontario Teacher's Unions. Keep in mind with these frauds the money is coming from insurance company, your school endowment, etc. It's not other people's money.

Well this is part of what creates the conspiracy theory that some state actors were behind FTX. At the very least, the fact that SBF's mom was fixer for the Democrats, means he was likely Epstein level connected with political insiders.

More conspiratorily, while SBF's mom worked for a Democrat-aligned dark-money PAC, Sam Bankman-Fried himself is rumored to have donated more than a $100 million to Republican dark-money PACs during the general election, and multiple Republican sources confirm that a person in the crypto industry was their "white knight donor" for a number of Senate GOP campaigns.

Hope there was a future pardon promise in those handshakes...

Not sure if that rises to the level of sexual blackmail with minors but okay!

In my experience it's a class thing. If you have the type of pedigree where you parents, friends or family can put in $100k plus to allow a founder or two to pay their living expenses while they get it running and secure seed or round A funding. It's always a catch 22, serious investors want one or more of the founders to be full time dedicated to invest, and that founder needs to pay their living expenses while doing so. In my experience the founders that get funded are either people with the pedigree that comes with money, or people that are experts on their field, have worked whole careers in industry and have some money socked away to float themselves for a year or two while they get it going. There is a third category of consultants/freelancers that create products as a thing to work on when consulting is slow, but these are often bootstrapping type things that don't really go looking for money.

Seems like a good time to remember this deleted hagiography of SBF by Sequoia: https://web.archive.org/web/20221027180943/https://www.sequo...

Lol.. Twitter was flooded with screenshots of such articles (paid or otherwise) praising SBF.

I think a lot of journalists, experts, and politicians arrived at the same conclusion around the same time, which is that credibility isn't worth bothering with because there's a base level of people who will unquestioningly believe them if they make them feel the right way. If you're angry at the right people and causes, and you "stand with" and support the correct things, then truth and reason is not relevant. Actually it's something dangerous to be feared, because it could cause uncomfortable emotions.

> credibility isn't worth bothering with because there's a base level of people who will unquestioningly believe them if they make them feel the right way

It reminds me of this tweet/picture/article

>Rebecca Grossman’s perfect life became a perfect nightmare. “Everything changed in a split second—overnight,” she tells Los Angeles during a half-hour Zoom call from her lawyer’s office in October.

that conveniently buries the lede that she was a drunk who ran down and killed two kids.

https://twitter.com/LAmag/status/1594917490366337025

Better title would be: "I wouldn't take advice from sequoia if my life depended on it and you should not either"

Thanks for the link. There are some real gems in there and also made for an interesting read as a non-cryptonite (in other words I have no dog in the fight, skin in the game etc).

"He only gave himself a 20 percent chance of success, but, in his mind, SBF needed extreme risk to maximize the expected value of his lifetime earnings—and, therefore, the good his earn-to-give strategy could do. The fact that he was, by his own lights, overwhelmingly likely to fail was beside the point."

I guess that the whole mess boils down to a few old chestnuts - #1) Don't bet money you can't afford to lose (investors) and also that #2) you can only run at the red-line in terms of pharmacology for so long before it bites you in the arse.

I'd take the "effective altruism" and long-termism stuff with a pinch of salt. Just seems like a way for wealthy people to justify hanging onto or acquiring boatloads of assets and saying "ah but it's for the good of humanity that I alone possess all this wealth"

Yeah, this narrative is getting debunked as we speak. Long overdue.

It's a shame a few really visible assholes are ruining the public's perception of what is otherwise very reasonable.

The bit about making as much money money as you can is not at all what effective altruism is about, but as usual nuance is the first thing to go when social or traditional media reports on something.

This.

Effective Altruism is not the same as Earning to Give, and I really wish that the distinction was being made more clear.

You can embrace EA to, for instance, make the most of the $1,000 you give to charity every year. There's nothing nefarious about asking "Where does this money do the most good?"

Earning to Give is a becoming a bit of a nightmare though as it's turning out that a lot of people embracing and pushing Earn to Give aren't giving as much as they're keeping, and aren't earning as much as they're stealing.

I mean "effective altruism" is really just "I know things better than you. See the amount of money I have made is proof, therefore I'll make the decisions on how to spend the money on shaping the future of those peons I took the money from instead of them, you know, doing it themselves".

Good old wish to tell others how to live in a cozy fuzzy warm blanket of dogood. See also politician, dictator, clergy etc.

> I mean "effective altruism" is really just "I know things better than you.

No. It's rather "the marginal utility of this money for me is much less than it is for others". As far as effective altruism is imposing anything on anyone else, it's more of "It's immoral to spend money on things you don't need. You could be saving people's lives instead."

Note I'm not part of the movement. I'm using money to buy free time for myself.

Your interpretation is quit a bit more charitable than mine (pun not intended). I don't disagree with it and I guess it is really hard to judge motivations.

For me, the quota for benefit of the doubt has been mostly used up.

> For me, the quota for benefit of the doubt has been mostly used up.

By what?

Thanks for the new word too.

I've seen this linked many times but only just now got around to reading it and... this is really embarrassing for the author. Never mind that the guy who he says will be a trillionaire one day turned out to be a fraud. The writing itself is awful. He starts by breathlessly describing how "risk neutral" SBF is and then not long after describes SBFs need for "extreme risk" when looking for his next venture (which led to FTX). He comes off as obsequious and uninformed. It's bizarre.

He's also somewhat self aggrandizing. Like he knows something others don't. "I don't know how I know, I just do. SBF is a winner." My guy, SBF was allegedly worth 20+ billion already and you're predicting that he'll be a winner? It's like predicting that Brazil, up 4 goals at the half, will win the game.

> He comes off as obsequious and uninformed. It's bizarre. He's also somewhat self aggrandizing.

Sounds like every venture capitalist to me. Most of them got lucky selling some random software company to Yahoo or some analogous route or riding the biggest tech and stock boom in history but come out thinking they’re oracles and literally better than everyone else. Couple that with cult of personality and the worship they get.

The author (who was hired to write the article) pinned tweet: https://twitter.com/AdamcFisher/status/1590466104773992448

and a follow up when called out on it: https://twitter.com/AdamcFisher/status/1590805407949533184

"Lots of lessons" indeed.

Unrelated but any chance you could email me? I’m looking to buy/rent some RX Radeons for mining and your posts on the subject have been very helpful. Have some questions that I hope you could help with.

Done!

>He starts by breathlessly describing how "risk neutral" SBF is and then not long after describes SBFs need for "extreme risk" when looking for his next venture (which led to FTX).

I reviewed that part, and it's not a contradiction[1]. Risk-neutral is the opposite of being risk-averse, and so the former means you favor the riskier ventures. In the language of that paragraph, risk-neutral means you will spend $1 for a 50% + epsilon chance of winning $2, and spend $1 for a 1-in-a-million plus epsilon chance of $1,000,001.

This risk-neutrality, of course, violates the Kelly Criterion and came back to bite him.

[1] Which is not, of course, to defend the article generally!

Perhaps I misunderstood that part of the article. I understood it to meant that to be risk neutral one must be willing to do both but I wasn't seeing examples of both in the article. I was seeing glaring examples of "extreme" risk seeking.

> SBF was acting uncharacteristically shifty. There were several canceled coffee dates, and when the two finally did get together … SBF evaded even the most innocuous of questions.

I mean, yeah, wow, this could have been seen as a view to the future.

Contagion is a poor word, IMO.

I would use "house of cards".

"Contagion" suggest completely innocent players getting affected and dragging others.

IMO anybody "investing" large sums of money on behalf of others is responsible for understanding what they are doing. I use quotes around investing because most of these companies do not really invest even on a good day when they don't touch crypto -- most just speculate on price which is completely different from investing -- which is putting money into something that produces more money because you think it is is sound and will be producing more in the future.

> Contagion is a poor word

> "Contagion" suggest completely innocent players getting affected and dragging others.

??? That is what is happening in the FTX saga...

What are you talking about?

For years plenty of people have kindly explained to whoever would listen that crypto is 99.9% a scam. Uninformed individuals buying into the hype are victims, but every investor in FTX or any related firm knew exactly what they were doing and chose to take the risk they took. They’re responsible for their losses and complicit in the scam.

Except that FTX isn't "crypto" it is/was a centralised exchange, a company just like others. So whether you believe crypto itself is a scam or not, this is straight up old-style fraud from a company doing things they shouldn't, so not really the same thing.

FTX had enormous crypto holdings and made investments in companies you’d definitely consider crypto companies, notwithstanding that there aren’t any “pure” exchanges in the crypto world anyway—they all get their noses in it.

FTX wasn't just an exchange for crypto. they had their own crypto token, FTT. the whole fraud is based around the fact that the valuation of FTT was in reality fraudulent.

No it isn't. That's what SBF is trying to tell people to make it sound like it's just a story of incompetence and incorrect valuations. They stole user deposits which were specifically not meant to have anything done to them but be held and used them in the trading arm/to prop up other things.

The price of FTT shouldn't have mattered to anyone not holding FTT. But yes the precipitant here was that they had clearly been thinking "oh we have loads of FTT still so can always sell that to cover user withdrawals and won't get caught".

ok, I agree with that too, but I also strongly believer that FTT (and most tokens) are created to enable fraud such as this (we can use our fradulent token as a means of collateral). Perhaps your argument is, even without FTT they would have found other means of stealing peoples deposits with a different cover story, and I guess I buy that as well.

Just use their list of "assets" to illustrate your point. In descending order from the back-of-the-envelope balance sheet of doom: SRM $2,187M "other ventures" $1,475M GDA $1,150M SOL $981M MAPS $616M FTT $553M Anthropic $500M "locked" USDT $500M HOOD $472M USD in Ledger Prime $200M USDB $73M PYTH $63M OXY $54M ETHE $53M TWTR $43M STG $45M FIDA $36M DAI $28M DOT $28M

and so on in to irrelevancy. Its a bunch of garbage "coins-that-definitely-arent-unregulated-securities" (SOL, MAPS, OXY, MSOL) and related garbage producers (SRM, GDA, etc). More or less their entire set of assets is either crap that they made up to sell to rubes, or crap that someone else made for FTX to invest in and sell to rubes. They dont and never did have meaningful assets to back teh house of cards once they stole their customers real USD.

https://d1e00ek4ebabms.cloudfront.net/production/7ab64a3b-6c...

The root basis for the for all of the fraud Sammie boy engaged in starts with the FTT token.

Now the no true Scotsman fallacy people are throwing around is just that, FTX is and was a crypto company.

Do you mean that before FTX directed customers to wire deposits to Alameda and then immediately misappropriated the funds, they launched a token? like, one of them temporally preceded the other, even though the actions were unrelated?

This is incorrect, they just stole customer funds. They could do that without issuing a token.

> Except that FTX isn't "crypto"

nobody buys this line

> it's not real communism

Same thing all the time, true believers have a hard time being critical of themselves.

FTX was a crypto company full stop

If you’re trying to equate communism stuff with Stalin or something then of course there will be reasonable push back. You’ll find a lot less if talking specifics like Lenin or Cuba. Otherwise communism and politics are a lot more complicated and nuanced than the simplicity that is cryptocurrency.

> this is straight up old-style fraud from a company

Traditional banks definitely go up bankrupt, and regulated financial entities definitely break laws, but it seems to happen with alarming frequency with crypto companies.

Given that the only two proven use-cases for crypto are doing an end-run around regulation/laws (however foolish or unjust people may believe those rules to be) and speculation/gambling, it also doesn't seem that surprising?

I would probably add a distinction that one of the main current use-cases proven is avoiding restrictions rather than regulation/laws. I think a much more positive case can be made for working around limitations that are put in by large players in various industries to make it harder for the common person to do something or start a business in a given area, even in cases where there aren't specific laws around it.

> avoiding restrictions rather than regulation/laws

Could you give an example? Most of the ones I've seen are regulations/laws that someone simply thinks are unjust, eg a country's currency controls or avoiding laws designed to stop money laundering.

Or, you know, explicitly trying to make sure north korea can sell the crypto they make with ransomware.

> Traditional banks definitely go up bankrupt, and regulated financial entities definitely break laws, but it seems to happen with alarming frequency with crypto companies.

Traditional finance can be just as bad. Remember the savings and loan crisis? Just as regulations had to catch up with banking so too will they for cryptocurrency exchanges.

Sure, but I’ll note that you’re pulling an example from 30-40 years ago here where I’d be a little surprised if you couldn’t find an example of malfeasance leading to loss of deposits for at least every year since MtGox went down.

Yes but also consider how long banking has existed, and yet this still happened just 30-40 years ago. Cryptocurrency exchanges are relatively nascent in comparison.

The fact that a lack of regulation results in a marketplace of scams was known before bitcoin was invented. Naivety of that is not acceptable. Bitcoin chose not to build in any protections in a financial systems to stop scams means they were purposely, or out of abject stupidity, leaving them out. Bitcoin doesn't get to say "oops we can add the ability to stop scams later" because it should have been table stakes from the very beginning

But bitcoin was literally built to be free from regulation. Why is that?

Okay, but imagine instead recreating the system where the SLC happened vs continuing in one where it's been accounted for...

Among its other endeavors, FTX created FTT, a token that had a peak notional market cap just under $10B, and that value seems to have been used to paper over massive holes in the FTX balance sheet. Massive, unexplained movements of FTT between FTX and Alameda Research[1] presaged the imminent collapse of both companies, and Binance dumping their FTT holdings was the precipitating event. FTX is about as "crypto" as you can get.

[1] https://cointelegraph.com/news/alameda-research-ftt-token-tr...

A self-issued asset is an unregistered security and has nothing to do with decentralized cryptocurrencies like bitcoin or Ethereum.

Nice when you get to define what Real Crypto is. I had been lead to believe that anything goes.

Then you're part of the problem. Bitcoin is real, the rest are scams. What part were you struggling with here?

What property of Bitcoin make is less of a scam than ETH?

The rules of Bitcoin are fixed in place, and no one party can adjust them in future. ETH has core developers who can make any changes they wish whenever they wish.

Well that's untrue.

The rules of both BTC and ETH are enforced by miners. At the moment ETH miners are generally amenable to changes by the core dev team. But there is no reason why future BTC miners could not do the same.

In particular, some of the same groups mine both BTC and ETH so it is clear they are amenable to changes.

Secondly, it's unclear why your presumption that change is bad is correct. The change to proof-of-stake for ETH is clearly a good thing environmentally for example.

FTT was an ERC20 token on the Ethereum blockchain.

If it's "nothing to do with decentralized cryptocurrencies" then neither is DeFi which is built around trading ERC20 tokens.

now you’re getting it.

If FTX isn’t crypto, then I guess Binance, Coinbase and Crypto.com aren’t crypto either?

Funny how crypto pumpers, when they were looking to sell some NFTs or whatever, have been more than happy to promote these exchanges as easy ways for retail investors to get their money into the system. But when the shit hits the fan, now the same crypto pumpers are saying that real crypto is something completely else.

> If FTX isn’t crypto, then I guess Binance, Coinbase and Crypto.com aren’t crypto either?

Indeed they're not. "cryptos" are cryptocurrencies, like Bitcoin. FTX and alike are centralized exchanges (CEX).

This confusion is like calling banks and Wall Street "the US Dollar". And when Madoff and Lehman Brothers happen, calling out on the USD instead of the fraudsters.

The USD allows to do money laundering, fund terrorism and create scams, but that doesn't mean it is a scam itself, or that it should be banned, or that people who use the USD participate in a scam.

Eh, USD is not just the dollar, it is an entire set of systems that include regulations that prevent fraud schemes. The USD without these systems would be the broken joke BTC is currently.

That's right, they are not crypto. They are exchanges. They operate very similar to stock exchanges except the asset classes they operate around are different. People pointing at crypto's failure right now would be equivalent to TD Ameritrade blowing up and saying stocks failed.

I think your comment is a bit misinformed. Your reply is written as if crypto itself failed when it was the exchange that failed. They took client assets and re-invested into other companies which also serviced retail investors. This collapse is due to poor corporate accounting and controls.

"Crypto" encompasses both the technologies and the systems created and the external effects they generate on the world. When the result is a bunch of scammy centralized exchanges crumbling? That's what "real" crypto is, regardless of any initial guiding light goals.

Just like how the USSR and its actions were "real" communism, regardless of how close they mapped to original utopian dreams about what communism would be. How it plays out in the Real world is what matters, and what makes it the Real thing.

I think you are conflating your understanding of the definitions.

Stock exchanges run exchanges to trade stocks.

Crypto exchanges also run exchanges to trade cryptocurrencies.

FTX is an exchange that trades cryptocurrencies. FTX went under and pulled all companies it invested in with it. However, the cryptocurrencies are still running.

What FTX did was criminal and it's well documented and more of it is still being discovered. It's just odd that you would suggest an asset class results in "scammy centralized exchanges crumbling".

It would be like saying:

> "Stocks" encompasses both the technologies and the systems created and the external effects they generate on the world. When the result is a bunch of scammy centralized exchanges crumbling? That's what "real" stock is, regardless of any initial guiding light goals.

“Crypto” has incentives that have caused this to happen over and over again.

A person with so much too much money that they invest in scams like crypto doesnt deserve pity. They are no victims. In a sense, that is financial darwinism at its best.

People don't deserve to be exploited just because they don't know better.

There is a difference between greed and plain uninformedness. Those that invested into crypto are clearly greedy, wanting to multiply their money without providing any value to the society.

Yep. Thank you. I have been doing this and have been constantly downvoted.

People just don't understand that it is fundamentally broken as it is. Not only it is broken as a financial instrument, it is a magnet for shady people and shady money.

I am unsure if you are knowledgable about the situation with FTX given your comments. However, I do want to hear your opinion. Could you share what was broken about crypto in this FTX case?

I know this is going to sound heretical but perhaps crypto is broken because it is not regulated.

Exhibit A: FTX

To be fair, FTX isn't a result of crypto being unregulated. Operating an exchange is regulated to some extent, but this is a story of failed corporate governance amongst many other things.

FTX is exactly because of it being unregulated or where there was regulation -- it being absolutely inadequate and ineffective.

Any sane regulator would not allow the shit happening that happened in FTX.

This is not a company making bad business decisions. This is company making bad criminal decisions with the money they did not own and were not free to do what they pleased and creating impression of value in a fraudulent way.

"Failed corporate governance" is the root of most crimes like this. It just means that no one was watching the hen house.

What's criminal here is that it wasn't just failed governance, there was literally no governance. They comingled funds (it's just a big pile of cash, right?) and didn't even consider risk. [1] This is what happens when Scooby and The Gang run a hedge fund. Zoiks!

The point of regulation is that it ensures that companies have frameworks like this in place, and that the actors are playing fairly. Mainly because we can't trust some people among us to not take advantage of having access to other peoples money. You can't build a civilization on the back of "Trust me bro I'm good for it".

Think about it, why do people regularly hand over their money to their bank, when they've never met the people actually running it? We trust that if we put money in, that later it will come back out. But why? It's because regulation solves the trust problem, if your bank is FDIC insured you're covered. Thanks government!

Yes regulation is an evil, but a necessary evil. It's a tax on everyone because some people can't be trusted with the keys to the bank vault. The government ties their hands, that's a good thing. It's harder to raid the cookie jar with one hand tied behind your back.

[1] https://www.yahoo.com/video/sam-bankman-fried-said-hed-13173...

Agreed to everything you are saying. I think the issue I have with most comments here is that they are misinformed of the issues and are just pointing a finger at the asset class even though it wasn't the cause.

By asset class I assume you mean crypto in general?

The issue I have with this space is that lack of central/governmental control is the original selling point. Lack of regulation is a defining feature, not a bug. This is a huge red flag for me. If I was a con-artist, I'd be drawn to this space like a moth to a flame. I don't trust any of the players in this space, anyone legit would be making real $$$ in TradFi. It's the modern day junk bond.

This picture summarizes the situation perfectly. Caveat emptor indeed. [1]

[1] https://i.redd.it/qul2xd7anl2a1.jpg

FTX, or Coinbase or any of them, are not regulated.

Not as exchanges, not as brokerages, or anything else resembling their supposed business model.

They’re registered business but that’s about it.

That's not true, and I said they are regulated to an extent. They have to get their licenses and maintain certain requirements like separating client assets which is regulated by FSA depending on the country.

I think this begs an explanation.

The reason people detest regulation is because a) people detest the government and b) people think regulators are corrupt and/or ineffective.

But what people are doing is incorrectly extrapolating from one aspect of the problem and then falling into a trap of a logical fallacy.

It goes something like this: The government or the regulator is corrupt and/or ineffective therefore regulation is bad. If regulation is bad then no regulation must be good.

Well, in fact what the government does (at least to some extent, at least in some countries) is it takes care after its citizens. Even if this care is not distributed justly, equally, efficiently and competently it is still the fact that most citizens are way better off having the government than not having it.

Of course this doesn't mean we should stop pushing government to do better.

Similar happens in financial world -- people dislike regulation for all its failing but the truth is that great majority of financial players by numbers are better off with regulation than without it. By numbers, most players in financial markets are simple people who invest money for retirement but don't have enough knowledge to protect themselves from financial predators.

Case in point: crypto. Where regulation is thin or non existent and people get robbed blind right and left by organisations who have knowledge and resources to build schemes to extract wealth from smaller players that can't defend themselves.

If you are like me, saving your money for retirement, you absolutely want regulation. Regulation is your friend -- this is some government weight trying to make sure that at least some rules are respected at least most of the time.

There are financially savvy people who will do well regardless. Regulation does not affect them much -- they will make money regardless. Regulation is for small people like you or me trying to save up a bit and not loose it, because without regulation you are bound to loose the money sooner or later. Or you will pay dearly to protect your assets to the point where it is difficult to accumulate any wealth on your own.

I agree regulations is good and I am for it. However, all of your comments are just pointing a finger at cryptocurrency as the cause of the issues here when it's not. Your arguments might be valid in other discussions, but your premise is misinformed.

The FTX fallout wasn't not a result of the asset class in question. It was much more than that. Even IF crypto had regulations, it wouldn't have been able to prevent the blatant fraud and criminal activities that happened in FTX. I would really suggest you to read more about it first.

You can learn about it in this video here which covers the key points: https://www.youtube.com/watch?v=l3HfrRjWilQ

Here is another commenter who also talks about it: https://news.ycombinator.com/item?id=33879829

Crypto could totally be a currency. The fact of the matter is that it sort of is. In its most raw terminology of currency. It is not however an insured currency. So you will get all the fun things you get with that. Massive inflation/deflation, bank runs, sudden insolvency, probable scams, etc. Our current currency system is the way it is precisely of what you are seeing in real time in 'crypto'. These sorts of things happened many times before our central banks got involved and regulated them. If you want to see some real shenanigans read about the banks from the 1800s. History does not repeat itself but it sure rhymes.

I was not surprised it happened. The only thing that surprised me is that it took this long for someone to make an enron sized mistake.

The macro econ guys should have a ton of fun and probably a few papers out of it. As it looks like in addition to the probable fraud here there may be some new things to learn about monetary systems. In this case how crypt might actually be very tied to existing monetary systems they seek to get rid of. Which is an interesting result that crypto was promising to end.

The issue wasn't cryptocurrency itself though. The issue was that FTX was investing into companies and they were essentially trying to run a fractional reserve against their own client assets. Those issues would happen regardless of the asset class.

No arguments. Crypto is a form of payment system, if we want it or not. It is however an unregulated and uninsured currency system that may or may not have actual capital backing it up (depending on the coin). My point is you will see wild swings of interesting things happening precisely because of the unregulated nature of it. This is not 'new' because of crypto. It has happened before, it will happen again. Regulation also does not necessarily means 'it will not happen'. It usually just slows it down enough to catch it before it gets wildly out of hand. Also as a payment system crypto is interesting, as many people seem to be using it as an investment vehicle precisely because of those wild swings.

This comment is just as dumb as someone which would accuse tradfi of being 99.9% scam because they fell for Bernie Madoff.

Complicit is however the lobbied senate giving sbf a platform, but even worse is the SEC / Gensler, borderline criminal, definitely negligent and incompetent.

I would love to know who in power knew what, and who looked the other way. It reeks of corruption.

Rep Tom Emmer was one of the original "Blockchain 8" who asked the SEC to back off of asking tough questions in the crypto space. [1] Of note, 5 of them received direct campaign donations from FTX.

Now Emmer recently is on the record saying the FTX debacle isn't really FTX's fault, it's the SECs fault for letting this happen. [2]

In his own words here. [3] You can't make this stuff up.

[1] https://prospect.org/power/congressmembers-tried-to-stop-sec...

[2] https://www.theatlantic.com/ideas/archive/2022/12/ftx-crypto...

[3] https://twitter.com/RepTomEmmer/status/1504117902080942084

In fact one could argue that the majority of investors knew precisely that it was a scam, precisely that it was a house of cards and, blinded by their own greed, thought they could get in and out before it all fell down taking some other sucker with it.

The people I feel bad for in this situation are the people on the receiving end of the pension funds that bought into it.

It seems like there are plenty of people essentially thinking something along the lines of: "I know this is a useless asset that only an idiot would think has real value, but I will get in and unload it on a bigger idiot before the crash...".

The issue with investing using the "bigger idiot hypothesis, is that sometimes, you are the biggest idiot and are left holding the bag of sh$#.

Sadly, it seems that often the biggest idiots somehow end up in governments and financial institutions.

The Ontario teachers pension fund invested $95 million into FTX that they have to write off. They have $295 billion under management, so 0.03% of their assets were lost. In the last week the Canadian dollar fluctuated between from 75 down to 73 cents on the US dollar, or 4% of its value. I don't think the teachers pensions are affected by the fluctuations of the USD based portfolio of the fund, and they certainly aren't going be affected by the FTX investment.

Hmmm... Everyone knows when they approach a roulette wheel that the odds are 37 to 1 against them. I'm not sure the same could be said for crypto investors.

And, honestly, I have no particular sympathy for them because even my low-brow self saw all kinds of red flags and stayed away from crypto. But I'm not going to claim they all went in with their eyes wide open. There was some serious hype/subterfuge going on that no doubt fooled a lot of people.

It's easy to write off anyone who got into the crypto space at all as grifters and scammers--or maybe rich people/institutions who made a small side bet because "why not?" But you probably also have some number of people who can't see their way to ever having six figures of savings and they see other people getting rich and think "Why not me?"

I know. Might as well throw in Powerball and slot machines as well.

I have at least one friend that makes risky investments for the very reason you gave: he's not going to get rich any other way.

I still disagree with him though. I prefer the "get rich slow" schemes over all the others - even though it means I'll never own a yacht.

I the rigged system around me but that doesn't make playing the lottery smart.

Every teacher in Ontario lost $600.

Nobody's innocent in crypto. You cant wish to be the last survivor hoarding wealth when a system you try to destroy implodes and then turn back when you get your nose bloody "taxpayers, can you regulate my Anarchy, it's not working as advertised".

Is that different from regular banking/finance/investment/speculation?

I’d say that’s true up to a point, and that point is when unsophisticated customers watch an FTX commercial during the Super Bowl and then send $10K into SBF’s pocket. Those people are innocent.

Crypto and stonk gambling are the contagion I would say, with this being a specific bacterium.

They're saying that "contagion" is where people not even related to the failure are getting hurt. So if an innocent person who put money into FTX loses it, that's bad, but not "contagion" since it's still limited to people who were directly related to what was going on.

But if FTX were to collapse, causing other failures, and now someone who has never heard of crypto or FTX loses money in their ordinary money market account or something, that would be contagion.

I only somewhat agree.

If you are tricked or scammed into believing an investment is better than it is, then some blame is on the one doing the defrauding.

If you put $1B of somebody elses money with no or BS research then it is still your fault.

It sometimes seems to me I put more effort into researching products I buy on Amazon than some of these do when transferring hundreds of millions of dollars.

How could you detect secret preferential treatment? You could only do so after something happened to expose it.

From Wikipedia:

> According to John J. Ray III, Alameda had a “secret exemption” from FTX’s auto-liquidation protocol.

This could only become apparent once Alameda was not margin called when it should have been. Which is when something went quite wrong to trigger the need for the margin call.

It is very rarely that there is only one fishy thing about bad business. Bad businesses are run by bad people and bad people can't really help themselves but be bad in a lot of things they are doing (it is a matter of character).

In almost every case those bad deals had red flags all over them if you only care to look.

"Crypto" is red flag enough -- anything about it should already be treated with extreme caution.

It has always been interesting to me to see people go do a version of a woman falling for a man who mistreated his ex wife. No. If he mistreated his ex wife it is very likely he will do the same to you. It is a matter of character and changing ones character substantially is very difficult because it requires you to have qualities that you are missing if you are a bad person.

This is very true. If you've ever had a "bad boss" at work, chances are that they did not do just one thing, but many things that were bad / against other people's interests.

I agree anything crypto-related needs an analysis of what happens in a 99% drop.

That is because even Bitcoin crashed 70%+ quite a few times since inception. As such, leverage is reckless.

An exchange should not have been exposed to price fluctuations. Only to trading volume (if the fees are proportional to the amount exchanged).

When "boring" companies do real due diligence, the due diligence team is supposed to read the contracts to find such things.

Also, the management team of FTX, should in fact inform the ones making the due diligence about such cases...

This is why public companies are required to disclose mountains of paperwork. Forcing them to admit things in a legally culpable way makes it harder to hide shenanigans.

Man, it's almost like the regulation has a point or something.

What probably happened here is one VC played the 'pump and dump' game for one of these tokens 'gamed' by SBF then shared that with other VCs. Before you know it, that fucker had clients lining up to him to invest in his 'proven' scheme no questions asked.

Greed was the main theme here, not lack of due diligence.

What greed does is make people blind and deaf to reality when that reality does not agree with their beliefs.

Whether they knew or did not knew the facts is irrelevant to me. Does it really make a difference which scenario happened?

a) They decided to forgo research ("better not do it in case the findings will endanger my bonus")

b) They did research but decided to not act on it because they already committed themselves to making the decision

There are technical legal differences here but for me in both cases you just failed in your responsibility for somebody's assets.

Can you cite the research you performed in the last few years that allows you to differentiate between exchanges that are scams and exchanges that are not scams?

The question has too many variables.

Though none of these exchanges are regulated by any authority so it's impossible to know which one will disappear with your money tomorrow.

AFAIK Almost all crypto companies operate in the dark. There's little due diligence to be had when none is (legally) required.

I recall coming across a clip of Chamath Palihapitiya, a prominent VC saying he once had the opportunity to invest in one of SBF's companies and demanding he (SBF) create some corporate governance in order for him to invest and SBF blew him off.

There were clearly some concessions made by thirsty VC firms to pass on the due diligence in the promise of 'guaranteed' returns.

Does any of this information matter to clients? Ofc not when they continue to get their annual dividends from the VC firms.

Crypto is just one piece in the basket of investments for them. The smart VCs hopefully didn't invest too much of their allocation.

All those tokens are pump and dump.

They exchanged dogs "worth" 1 milloon each for 2 cats "worth" 0,5 millon each - and some people would come and buy this crap at those valuations.

Once the music stopped playing (no more bagholders coming to buy) turned out that dogs and cats valuation is closer to zero than to millions.

What is the reason to value any of those junk tokens more than 0? Bitcoin is at least "the" original.

The 700 other shitcoins are just shit.

You bring up a great point - but there's got to be a point where people have to realize that an investment's promised return is simply too good to be true. That realization doesn't have to come by way of having anything besides common sense.

FTX was promising an 8% monthly ROI (or a yearly ROI of 96%, which is absurd). Madoff was promising roughly 10% annually for years until people caught on, that's roughly 0.83% per month. FTX was promising nearly 10% that. Think about that. And that's with their TOS saying they won't use depositor's crypto for their activities with Alameada.

Are people blind? Seriously. Look at this objectively: "deposit your crypto with us, and we'll give you 8% monthly! your crypto is safe, and we promise we won't trade with it."

One needs to only ask the simple question of "how do you make enough money to cover paying every depositor a yearly ROI of 96% if you're not engaging in extremely risky and speculative trading? And if you somehow manage to do so, whose money are you trading with, if you're not using liquidity derived from our token deposits?"

I'd suggest that all investing is fundamentally "speculating on price".

No, that is not true.

The idea of speculating is "I don't care understanding the underlying business, the only things that matters is the price is going up".

But that does not mean there are no people actually investing. Investing means you understand at least to some degree the thing you are investing in and you think it is sound investment -- meaning there is good enough chance the money you will put in it will get multiplied over time. When actually investing you don't really care about short term price changes. When my stock falls rapidly I instantly check the news about my company to see if there exists some fundamental reason for the fall and if there is none -- I usually start thinking about whether it makes sense to buy even more of it while "stupid" speculators let it become cheap.

All investing is fundamentally a prediction about the future.

Getting comfortable with a level of risk, doesn't change the fact that all predictions about the future are definitionally speculative.

"Investing" vs "speculating" is a matter of degree, not kind.

Traditional investments have ways of generating and returning money without selling the asset itself. For example, stocks in companies can pay dividends, real estate can return money by renting out properties. They are positive sum games and the risk of loosing money is much lower.

Speculating, like gambling is a zero sum game (at best). Any gains come directly from other players. They are inherently risky.

There is a qualitative difference here.

No, GP is right.

"Speculating" is merely a loaded term for investment that the writer does not approve of.

There's any number of plausible reasons why one person's investment is another's speculation:

- Is technical analysis investing or speculating?

- How much do you need to know to call it an investment? Do you just need to have heard of FTX, or do you need to have gone to visit for due diligence?

- How do you know it's zero sum? A business model may appear later that makes it positive sum.

EOTD we're talking about decisions under uncertainty. That's literally all decisions.

> Traditional investments have ways of generating and returning money without selling the asset itself. For example, stocks in companies can pay dividends, real estate can return money by renting out properties. They are positive sum games and the risk of loosing money is much lower.

This part is particularly suspect.

Let's say I make a crypto exchange and sell shares in the company. Let's say it pays dividends.

Is buying my shares speculating or investing?

Look at real estate, your other example. There's a massive real estate collapse going on right now, with enough empty units to fit all of Germany in it.

Is that speculating or investing?

I would just like to point out this piece of financial knowledge:

Dividends are actually the same as selling a piece of your investment.

The moment dividends are paid the share price falls by exactly the amount of dividend paid. One way to think is that the second before the dividends are paid everybody included the dividend in the valuation of the share price. They expect the dividend to be paid to them. One second after the dividend was paid they no longer include it in the valuation making the share price worth less to them exactly by the amount of dividend paid.

If you had a piggy bank with $100 bill in it and a cookie that is promised to you if you hold the piggy bank with the bill in it at certain time, the piggy bank is worth $100 and a cookie. But once the deadline passes you can no longer get the cookie and the piggy bank converts to being just a regular piggy bank with $100 bill and no cookie promised.

Another way to think is that the company just gave off 1% of their value to shareholders in form of cash making the company 1% poorer.

So if you had a share price of $100 and you expected $1 dividend, the second after the dividend is paid you are left with a share worth $99 and $1 in cash which is exactly what would happen if you just sold 1% of your shares.

And because nobody is surprised by the dividend, the fact of paying it has already been included in the valuation well in advance of payment. There is no reason for the valuation to change due to payment of the dividend (other than the company losing exactly the value they paid in dividend).

So, to summarise:

>> Traditional investments have ways of generating and returning money without selling the asset itself

This is false, as shown by my above explanation. Dividends are not generating anything and are actually the same as selling portion of your asset.

This is somewhat gigantically missing the point. Traditional investments have some kind of income stream based on actually creating value. When a company makes money to disburse me as dividends, they have actually created value and been able to generate some money in exchange. Therefore they can distribute the income without the company itself being cannabilised and sold to a greater fool. You could squint at it and consider that they are selling 1% of the company each time, but ignore the fact that they're also growing the company by 1% each time by creating real world value in their activities.

No, investments generate income.

Buying a house and renting it out is an investment. The value of the house doesn't fall because it's generating rent.

Buying a house with the intention of reselling it a year later is speculation.

Buying a car for your taxi service is an investment because the car now generates income for you.

Buying gold, crypto, or money markets is always speculation because these things do not generate income.

You can lend out your crypto for interest. Now it's an investment?

Sorry but the distinction between asset values and cash flows is not material.

I've worked with derivatives for many years and they're all accounted for together, like the GP says.

The point is if the company doesn't pay dividends, what will it do with the money? It has to grow, and growing isn't always a good idea. It means they have to expand either by being more competitive (cheaper, undercutting their existing business, less profits) or by moving into a market they don't know about (risky, might loose it all).

Looking at it another way, what's the point in owning stock in a company that never pays dividends. There's no point a company making profit unless they give that profit out.

> Dividends are actually the same as selling a piece of your investment.

Who are you going to sell the piece to? If it's back to the company as part of a share buyback, then yes, it's the same. If it's to someone else, then no, by not paying a dividend, the company now has to spend that money on something useful that will generate a return and mean it can pay a dividend in future.

Buying more expensive manufacturing equipment for your factory is an investment, even if the value of that machine falls after you buy it.

Investments generate an ROI, like the parent gave examples of (rent, dividends, the production of goods). Speculation is about arbitrage and reselling things at higher prices.

As is having any kind of asset, even cash. Cash being a really bad speculation in general (although good on occasions for short periods).

These are exactly my thoughts. Yet, success of an investment depends on price after all, and I feel like I can never be sure whether the current price is an expected value of business prospects, is pumped by never-to-be-realized dreams of bozos, or is downright a long-running pump-and-dump scheme. I'm afraid markets behave more like a Keynesian beauty contest.

Valuing a business is not easy but it is not hopeless.

Imagine somebody in your family has a grocery store and asks you to invest in it so that they can expand the business.

Do you know them as a person? Do they have track record of being truthful? Frugal with money? Resourceful? Do they have track record of keeping their word and succeeding at projects? Is their store doing better or at least as good as competition? Do their explanations of why they are going to succeed make sense?

Do you have some knowledge about running a grocery store? If you have, this can help you a lot with filtering truth from BS. If you do not, maybe it is worthwhile to get at least a little bit of knowledge?

While you can't predict the future there is a lot of signs of what you can expect from the person or business and if the investment is significant enough you should make sure to get at least some knowledge in the area. Ideally, you would invest in things you have some kind of expertise.

Reductively yes. Like all economic activity is gambling. If I get a job for X salary it is a bet I couldn’t get a higher paid salary somewhere else. If I buy a flight today I am betting it wont be on sale tomorrow. And so on.

When you buy a share of a business, people at that business innovate and change the business itself. The thing you buy and the thing you sell aren't identical. When you buy a bond you trade some money now for more money later under an organized system. When you buy gold or pork bellies or btc it cannot change. It cannot act. It can only sit there and hope to be resold at another price.

it's the proper term in economics, but yes

It is, but I don't like it because it suggests that things happened to affected companies due to purely external reasons.

It is like my daughter saying "the glass fell from the table and broke". No, it was you who dropped the glass or at least placed the glass in vulnerable position where it can tip off the table easily. Blaming the glass for it breaking is not very useful because it elicits no correction and same for companies -- suggesting companies were innocent bystanders suggests nothing has to or can be done about it.

even in economic usage, there's often an implication of "and then these craven assholes", c.f. the recent FSOC paper on systemic risk of crypto

Sure, just like if someone leaves their money in Paypal or Wells Fargo it's their fault they got scammed.

Proper word is fraud.

Not just that customer funds were comingled but that Alameda possibly never even made positive money in any year of its existence as the original trade that SBF tells of its creation is in fact a lie as of late 2017 Japan no longer paid premiums for crypto including bitcoin as it was down to 0.3% on charts. In fact only one left to pay premiums on bitcoin due to its illegal cash flow is still Hong Kong per charts at 30%.

The fraud play SBF was doing in which certain speculators were involved in and PUSHING to blind public was the crashing of other tokens. It also included VCs in doing such fraud. In fact one shark tank host was involved.

SEC regulation is coming to crypto, whether they want it now or not due to all this fraud by bad actors in the financial community. Everyone should note that the fraud was bigger due to the financial communities involvement in the fraud.

> In fact only one left to pay premiums on bitcoin due to its illegal cash flow is still Hong Kong per charts at 30%.

What? There is no HKD bitcoin premium.

I just wanna praise Molly White for the awesome work they do. https://web3isgoinggreat.com/ should be required reading for the whole internet.

*she does

Does referring to someone as "they" when you are unsure of their chosen pronouns count as misgendering?

To add to that, some context: I really didn’t intend to start a gender thing - I would prefer us to focus on Molly’s awesomeness - but I live with people of various genders and these days “they” tends to be my default pronoun choice. I even started to refer to my cat and my wife as “they” despite them being cis gendered.

I will certainly apologise if I have offended Molly.

when she has her pronouns in her bio yeah

Sequoia really made fools out of themselves here. When you listen to VCs they always sing their praises. Is it an emperor has no clothes situation?

Hindsight 20/20.

But how have they sized their bet? Maybe $210M is a drop in the $85B AUM bucket for them, and maybe even including this loss they get better returns than the market, from their investments overall.

Hindsight 20/20?

Anyone could tell you can't solve financial/social troubles with just moar tech.

And a distributed hash collision generator couldn't gain that much $$$ without something super shady.

This isn't hindsight 20/20. This is having eyes and not averting your gaze.

> Hindsight 20/20.

Valid point if they had effective due diligence but they didn't.

FTX on a cost basis was 3% of the committed capital for the fund that held FTX.

A minimal amount of due diligence on FTX would have saved them $150m and increased the fund's return by 3% - not a trivial amount.

Plus their name gave FTX credibility that probably led to others investing and losing money.

> Plus their name gave FTX credibility that probably led to others investing

This is key.

Have some friends who got into YC. As soon as they did, they had investors offering them money who had barely even seen their deck.

Probably the same happens with Sequoia. Investors see that Sequoia invested and they just blindly follow suit.

> A minimal amount of due diligence

Exactly what due dilligence would have saved them?

What numbers could they have looked at? How could they guard against those numbers being lies (cooked/parallel books)?

I'd usually have some sympathy with this perspective but there were so many red flags with FTX that there should be no excuse.

Just because sophisticated fraud can sometimes be hard to detect doesn't give you a free pass for problems that are easy to spot.

> What numbers could they have looked at? How could they guard against those numbers being lies (cooked/parallel books)?

That was part of the problem. The red flag should have been the fact that there were no numbers or books. Neither FTX nor Alameda even had a CFO.

Didn't FTX invest 500M in Sequoia later?

I would say the biggest fool is Temasek, Singapore's state investment fund, who set $275million on fire (0.1% of their net Portfolio). They really lost their minds on this one.

Temasek turns an annualized return of 14%. If they didn't take occasional Ls on specific investments, it would suggest they have an insufficient appetite for risk. 0.1% of their net portfolio is a rounding error both when considered against both the portfolio itself, and their expected return for any given year.

> If they didn't take occasional Ls on specific investments, it would suggest they have an insufficient appetite for risk.

I agree with this but it's a complete non sequitur to say this then gives them a pass for losing money on FTX.

If they took dollars and burned them live on TV would you say 'it's good they need to take an occasional loss'.

> If they took dollars and burned them live on TV would you say 'it's good they need to take an occasional loss'.

The EV of burning money is zero.

The EV of chucking some change into a firm that Sequoia has given $150m to and is writing glowing reviews of -- even with zero due diligence -- is probably pretty good.

That’s a completely different argument to the one that I commented on.

And if that’s what they were doing then it’s still pretty embarrassing.

Saying that Temasek has annual returns of 14% and that the EV of burning money is zero are logically inconsistent. The EV of burning $275million is actually about negative $1 billion over 10 years, offset by tax savings.

As others have noted, these exposures are not all the same: for the large funds appearing in the diagram tens of millions are harmless losses, while for small imprudent entities smaller stakes can mean certain doom.

Adding enough context to classify FTX contaminations on the slaughter - useful lesson spectrum would be a valuable improvement.

The further I scroll down that list of ridiculous pseudo-businesses on the right hand side, the louder I hear that famous quote from The Critic - ".. and nothing of value was lost!"

Hey there is a YC company in there

YC has been criticized for investments in the past that are unethical, or poor financial bets or both. So YC investments aren't immune from falling under "nothing of value"

Recent example: Kalthi

According to the article, Binance has $580 million locked up in FTX. But I thought that Binance sold all their FTX assets, which is what trigger the original bank-run on FTX. Was Binance not able to get their money out? If so, that seems disastrous for Binance.

Wow… Telstra!?

They’re a telco!! What in the world are they doing investing in dodgy crypto firms?

Telstra Ventures - they're a VC subsidiary: https://golden.com/wiki/Telstra_Ventures-PB4Z33Y

What's a teacher pension fund doing the same thing?

diversifying with a hyped-up fomo thing at the time? they have >200 billion so it's kind of a rounding error for them. In fact, for the majority of outfits listed, "contagion" sounds too dramatic. $24mil for Blackrock?

Because they have a huge amount of assets - but also a growing pool of pensions to pay out.

So it makes sense for them to put a limited part of those funds into risky ventures. I'm sure at some point they invested in, for example, Apple when that looked like a dangerous proposition.

To be clear - I think anyone "investing" in crypto is likely to lose out in the long run. But if you are a large institution it makes sense to spread yourself into as many ventures as possible.

It's a venture fund, as a lot of large companies have.

I don't really get the argument for it, I think it's pretty dumb overall. But it's not that uncommon.

FWiW their exposure is relatively low, the figure quoted is an investment of "1 - 10 million", that's against all other investments made by that Testra fund of which many are on the order of 20 to 40 million, and a few at 100, 200, and 900 million.

That you can still buy/sell the FTT token is pretty funny.

seems like cryptocurrency has become a casino for IRL events via tokens. Where real events are treated as transactions reflected in $$$ [1].

also seems most of the interesting cryptocurrency activity (like million dollar liquidations) happens entirely off blockchain, on centralized exchanges (maybe?).

[1] https://insidebitcoins.com/news/arg-sinks-almost-30-after-wo...

It was always funny to watch BTC news and it's impact on prices. The "this is good for Bitcoin" slogan is not that weird when prices overreact to news, go in opposite direction than the expected impact of new information or has huge swings in price while nothing happens on financial markets.

> seems most of the interesting cryptocurrency activity (like million dollar liquidations) happens entirely off blockchain, on centralized exchanges (maybe?).

Correct. I commented this before, but if you compare (for Bitcoin) total daily transaction volume from Coinmarketcap (which probably isn't complete) to the actual transaction volume on the blockchain, something like 80% of transactions does not involve the blockchain. At least, that's from the top of my head from the last time I did the math. And those blockchain transactions are probably in part moving from hot to cold storage by exchanges and people moving around crypto through personal accounts.

If decentralization is the main feature of crypto, then we might as well stop using it right away, since nobody seems to actually care about it.

Does anyone have any idea what might've happened to the $900M labeled "?" in the arrow from Genesis (Lending Branch)?

Not sure why Binance is not listed in Investors, as they are actually the first investor in FTX.

https://twitter.com/SBF_FTX/status/1590012124864348160

They appear in the right-most column a little further down the page, with $580m of "funds" locked up in FTX. If I recall correctly they sold their stake in FTX for a quantity of tokens like FTT, and it was the (ultimately unsuccessful) attempt to sell these that triggered the beginning of the collapse.

SBF bought out their share in FTX (using stolen customer deposits) in 2021: https://decrypt.co/76584/ftx-ceo-sam-bankman-fried-why-bough...

About the "???" arrow between FTX and FTX US: Is the official explanation really that both companies just happened to file for bankruptcy on the same day but are in no way related?

Facing Up to Risk

Stanford Public Law Working Paper No. 2850587

40 Pages Posted: 11 Oct 2016 Last revised: 14 Oct 2016 Barbara H. Fried

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2850587

In theory, this is exactly what should happen. All the incompetents go insolvent and are purged from the market. Unfortunately, I suspect most of the founders walked away wealthier than they started, and can go on to start their next grift.

It would be something if this FTX crime committed by SBF is the thing that triggers an economic depression.

Shitcoins all the way to the horizon.

for blackrock is nothing 24 million

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