Those of my readers who’ve been with me for a while know I’m no fan of cryptocurrencies. (See CryptoMania and Monkey Business.)
With bond investments, and savings accounts and certificates of deposit at banks, you give a bank, government or business your money and, after some period of time you get your money back with interest.
With stocks and mutual funds, you invest in a company or companies and you directly own a piece of that business. Your ownership may include the payment of dividends. But your investment is generally liquid and, if you invested well, you may get back more than you paid when you sell.
All of these investments are regulated by the FDIC or the Securities and Exchange Commission.
On the other hand, cryptocurrencies are not heavily regulated. They have no guarantee. And, as far as an investment goes, they’re the Kardashian of investments – they’re valuable for being valuable. Often there’s no underlying collateral that supports the value of the currency.
So, considering that the cryptocurrency market is the modern-day equivalent of the Wild West, it should not be a surprise that there have been some business failures. Back in June the crypto firm Celsius collapsed and declared bankruptcy. At this time, it appears that its customers have lost $4.7 billion. Several other crypto companies have followed suit.
But the big megillah is the recent failure of FTX.
What Is FTX?
FTX was a cryptocurrency exchange which acted like a stock exchange, except that it provided a market for over 300 cryptocurrencies. This means that if you had a cryptocurrency like Bitcoin, FTX would buy it from you if you needed to sell or, alternatively, sell you more. Plus, like a bank, you could deposit your cryptocurrency with them. In addition, FTX created and sold its own cryptocurrency, FTT.
FTX was founded by Sam Bankman-Fried (SBF) and is registered in Antigua and Barbuda and headquartered in the Bahamas. This foreign registration helped them skirt some US securities regulations.
FTX Performance
As a cryptocurrency exchange, FTX charged fees and commissions on its services. Forbes estimates that FTX has generated around $750 million in revenue for the fiscal year 2020 (of which $350 million was pure profit).
SBF and FTX made a number of donations to media and political organizations. It also purchased the naming rights to FTX Field at the University of California-Berkeley. All these “investments” increased the visibility of FTX and its appeal to investors.
FTX became a high-flying darling that saw investors of all sizes investing large sums. Celebrities like Steph Curry, Shaquille O’Neal, Larry David, and Kevin O’Leary all invested in FTX.
What Went Wrong?
In addition to FTX, SBF also founded a hedge fund, Alameda Research. Alameda made a number of investments, including investing in FTX by buying FTX’s cryptocurrency FTT. This made Alameda’s primary asset FTT and meant that the money Alameda invested in FTX was based upon the FTT crypto created by FTX. In other words, Alameda’s main asset was FTT and FTX’s collateral was FTT. This circle was like financially pulling yourself up by your bootstraps – a pure fiction.
On November 2 the news site CoinDesk wrote a story that described this financial chicanery. Several days later Binance, the world’s biggest crypto exchange, announced that it would sell its entire $529 million investment in FTT based upon this newly disclosed risk.
The Binance disclosure triggered a panic by investors who attempted to withdraw $6 billion from FTX on the same day. It was a modern-day “run on the bank” and FTX was unable to meet these withdraw requests. As a result, the value of FTT fell by 80% over two days.
Since its crash FTX declared bankruptcy and is under investigation California Department of Financial Protection and Innovation and other regulators. A class action lawsuit was filed on behalf of FTX customers and not only names SBF but also celebrity endorsers and athletes including Tom Brady, Gisele Bundchen, Kevin O’Leary, Steph Curry, Shaquille O’Neal, and, Larry David.
It appears that the investor panic and rapid withdrawal of funds exposed a Ponzi-like scheme where SBF may have siphoned off funds from FTX for personal use. Investors may never recoup any substantial amount of their investment.
Epilog
One of the things that’s rather amazing about the post-collapse FTX story is the very soft treatment of SBF by the US media. After he confessed to bilking investors out of billions, SBF was treated to a softball interview on ABC News, and participated in a $2,500 per seat New York Times round table event.
Remember that when Bernie Madoff couldn’t perpetuate his Ponzi scheme he confessed and turned himself in. SBF has confessed multiple times but is still luxuriating in his $40 million penthouse in the Bahamas. Why is he not in jail?
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“My grandfather used to say that once in your life you need a doctor, a lawyer, a policeman, and a preacher. But every day, three times a day, you need a farmer.”
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Huge Markdown!
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I don't believe in the whole cryptocurrency thing, but an informative read, even for me !!! X❤X
Good read Bud, not to short for us slow readers, but one of your better ones.