Does FTX’s Collapse Kill Crypto?
Posted November 23, 2022
Remember the Bernie Madoff scandal? No question about who was to blame: Bernie Madoff.
Same goes for Theranos: Elizabeth Holmes is 100% to blame.
But with the astonishing collapse of the FTX empire, matters have become more murky. The New York Times published a long reflection about who is to blame. They tick through every excuse. Maybe it is regulators who didn’t catch the problems until it was too late. Maybe it was VC funders who got overexcited by the brilliance of the funder. Maybe it is the whole crypto sector which really should be wholly owned and controlled by the government.
The one person who seems to be escaping blame is Sam Bankman-Fried. Very interesting, isn’t it? Why is he getting a pass from all the usual suspects? Maybe it’s his family connections. His mom is the founder of Mind the Gap, a major Democrat PAC. His dad is a law professor at Stanford. And his aunt is a major bigshot at Columbia University.
Why, then, has he not been trashed as the black sheep of the family who fell into a life of criminality? This is where I get suspicious. It turns out that his “philanthropy” roped in major media organs like ProPubicla, Vox, and Intercept, among others, and was dished out to major universities like Johns Hopkins, Stanford, and the University of Virginia.
A focus of his philanthropy was “pandemic planning.” Here he copies Bill Gates, not just the focus but the path to influence. He decided to do one better. He became the second-largest donor to the Democrats during the midterm elections. SBF’s instincts were that if he paid off enough of the right people, his scam (and let there be no doubt that it was a scam) could last and last. Then when it falls apart, he can escape blame.
So far, this trick is working for him.
The crypto sector was rocked by the revelations. They occurred in the middle of a bear market, which makes sense. When the market is up, everything seems to work just fine. When it crashes, the frauds reveal themselves in exactly the way Warren Buffett describes: when the tide goes out, you find out who is swimming naked.
Interesting note, however: the FTX did not shake up the sector nearly as much as you might expect. So far there has been no real sign of contagion. The tokens that were falling in price continued to fall, but those who expected thousands to fall to zero have been disappointed.
Let’s consider the token Solana, for example, about which I’ve previously written. It hit a high of $180 early this year. FTX owned a vast amount, and there was far too much entanglement between the two companies. However, Solana has survived and has even risen in the last few days, from a low of $11.70 to $13 now. This is a sign. When a token is tested this hard and survives, it’s worth further attention.
The stablecoins have so far fared just fine and continue to perform their work. Bitcoin and Ethereum have suffered huge falls this year, but the FTX collapse seemed not to rock their worlds. In fact, most of the tokens with which I have an intellectually partisan relationship have risen in value: BTC, ETH, LTC, DASH, BCH, XMR, and ZEC. To clarify, I’m not recommending a buy here! I’m only making the point that those who hoped FTX’s failure would finally expose the sector as a complete fake have so far been disappointed.
Theories of Crypto
There are four main schools of thought out there:
- It’s all fake. These people have been saying this for years, observing that crypto only became a thing after 2008 when interest rates were pushed to zero by the Fed and causing money, credit, and capital to chase any and every kind of tomfoolery for return. In this view, this is the only reason crypto took off and survives without a use case. It is all destined to come to complete wreckage.
- It’s all real. This is the opposite view of course, namely that the future is entirely built by blockchains. To the moon! Many tokens in this space will come and go during this hard transition but the main features will survive and thrive, same as the dot com bust did not spell the end of digital commerce. Sit tight and hold on: the future will be here eventually.
- One real asset. There is a school of thought out there called Bitcoin Maximalism that truly believes that absolutely everything in this sector is a “shitcoin” other than Bitcoin. Only Bitcoin has the network. Only Bitcoin has the developers. Only Bitcoin has been tested for fully 13 years and survived. It’s digital gold. Everything else is an impersonator and a racket.
I’ve never agreed with this view, by the way. My main criticism of this concerns scaling, which Bitcoin cannot, to which the Maximalists reply that there are second-layer technologies that cover the use case. I’m still unpersuaded.
- Some good and some bad. Only the market will tell. This is my view. There are thousands of terrible tokens floating out there and probably just as many companies that will come and go. I used to go to crypto events for years and I noticed over time that I rarely saw the same vendors year after year. The market is constantly changing. That’s a good thing. In any case, in this view, which is mine, Bitcoin is great but so are many others. The long-run test is always and everywhere the use case.
That said, a point we have all learned over the last five years is that there is no such thing as an immaculately conceived cryptocurrency. They are all tainted by the times of their birth: loose money and credit. As a result, they have performed more like any other financial product than most of the old gangsters in the space wanted it to. We had hoped, naively, that Bitcoin would free us from reliance on the Fed-based economy and only reflect the real value independent of centralized manipulations. That has turned out to be untrue.
Two days after the FTX collapse, the New York Fed opened a pilot program for a central bank digital currency (or CBDC). No question that this is a priority for the Biden administration right now. They want it badly as a means of providing a complete digital passport for citizens that will look very much like the Chinese social credit system. Your freedoms will be contingent on compliance. And your money too.
Right on cue, the collapse of FTX is being used as an excuse for ramping up this program. The timing is almost too perfect, don’t you think? Some people say that the collapse of FTX was even designed to do just this. What a plan! Start a fake company with a con game, feed all sorts of political interests, subsidize the midterms to stop the red wave, and then quickly fall apart to provide a lovely pretext for freedom-destroying currency reform.
It all seems too perfect. But maybe not! There is some reason that FTX is off the front pages. There is some reason why SBF is not joining the lineup with Madoff and Holmes. His only further use might be to join the regulators in the effort to create a CBDC: after all, this misunderstood genius surely has much still to offer the world!