LOL CRYPTO
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No idea how to buy here. Massive black box and contagion risk, the definition of a potential catch a falling knife.
Could wake up tomorrow with BTC sub 10k for all we know.
NO ONE SAW THIS COMING
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the kind of personality that can just lose it all and it’s a “oops” response
but we all saw him going broke coming a mile away from something stupid
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If you are a crypto exchange, you might issue your own crypto token. FTX issues a token called FTT. The attributes of this token are, like, it entitles you to some discounts and stuff, but the main attribute is that FTX periodically uses a portion of its profits to buy back FTT tokens. This makes FTT kind of like stock in FTX: The higher FTX’s profits are, the higher the price of FTT will be. 8 It is not actually stock in FTX — in fact FTX is a company and has stock and venture capitalists bought it, etc. — but it is a lot like stock in FTX. FTT is a bet on FTX’s future profits.
But it is also a crypto token, which means that a customer can come to you and post $100 worth of FTT as collateral and borrow $50 worth of Bitcoin, or dollars, or whatever, against that collateral, just as they would with any other token. Or something; you might set the margin requirements higher or lower, letting customers borrow 25% or 50% or 95% of the value of their FTT token collateral.
If you think of the token as “more or less stock,” and you think of a crypto exchange as a securities broker-dealer, this is completely insane. If you go to an investment bank and say “lend me $1 billion, and I will post $2 billion of your stock as collateral,” you are messing with very dark magic and they will say no. 9 The problem with this is that it is wrong-way risk. (It is also, at least sometimes, illegal.) If people start to worry about the investment bank’s financial health, its stock will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that its stock will go down, etc. It is a death spiral. In general it should not be possible to bankrupt an investment bank by shorting its stock. If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock.
The worst case is something like:
- You have 100 Customer As who are long Bitcoin on margin: They each have 1 Bitcoin in their accounts and owe you $10,000.
- You have 100 Customer Bs who are short Bitcoin on margin: They each have $20,000 in their account and owe you 0.5 Bitcoin.
- You have loaned 50 of the Customer As’ Bitcoins to the Customer Bs, and $1 million of the Customer Bs’ dollars to the Customer As. You keep the other 50 Bitcoins and $1 million as collateral.
- Your accounts show that you owe clients 100 Bitcoins and $2 million, and that they owe you back 50 Bitcoins and $1 million, and you have 50 Bitcoins and $1 million on hand, so everything balances.
- You have one Customer C who says “hi I would like to borrow 50 Bitcoins and $1 million, I will secure that loan with 150,000 FTT, each of which is worth $20.”
- You say “sure, sounds good,” and hand over all your collateral.
- Now you have 150,000 of FTT, worth $3 million, as collateral (and no Bitcoins or dollars).
- Your accounts show that you owe clients 100 Bitcoins and $2 million and 150,000 FTT, and they owe you back 100 Bitcoins and $2 million, and you have 150,000 FTT of collateral, so everything balances.
But then if the value of FTT drops to zero, you have nothing . You have no Bitcoins to give to the customers to whom you owe Bitcoins, no dollars to give to the customers to whom you owe dollars. You just have to call up Customer C and say “hey we need all those dollars and Bitcoins back.” But Customer C will not want to give you back all those valuable dollars and Bitcoins in exchange for now-worthless FTT. Also the fact that Customer C had all that FTT in the first place is not a great sign. It is an FTT whale, and FTT is now worthless. Has it been borrowing elsewhere against FTT? Are all those debts coming due?
Now let’s add a few more FTX-specific elements. One is that FTX is an exchange for levered traders, offering products like perpetual futures and leveraged tokens that build in margin lending. So whereas the basic model of Coinbase is “they buy Bitcoin for you and put it in an envelope,” the basic model of FTX has to be “they lend you money to buy crypto and then make use of your crypto to get the money.” In financial terms, they have to rehypothecate your collateral ; you can’t expect them to just keep it in an envelope if they’re lending you the money to buy it.
The other is that FTX is closely associated with a hedge fund called Alameda Research. Sam Bankman-Fried founded Alameda to do crypto arbitrage and market-making trades, and then he founded FTX to basically have a better exchange for Alameda to trade on. Alameda has lots of FTT, and last week Coindesk reported on its balance sheet; the gist of that report was “wow its balance sheet is mostly FTT”:
The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”
There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)
That is not in itself a reason for a run on FTX! It might be a reason for the price of FTT to go down, if you think that Alameda has too much of it and might need to sell it.
The reason for a run on FTX is that you think that Alameda is, in my terminology, Customer C. The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT, and a loan to Alameda. If they all take their money out, that’s a bank run.
And all of this is self-fulfilling: If you are worried about FTX’s business, then the price of FTT should go down. If the price of FTT goes down, then FTX’s business is riskier, because it has less collateral. If, say, the operator of the biggest crypto exchange gently raises one eyebrow and says “FTT, eh?” that can be enough to topple FTX. FTT goes down, leaving FTX undercapitalized, leading to customer withdrawals, leading to ruin.
Anyway it is still early and confusing but that seems to be the story of FTX. Coindesk reported on Alameda’s FTT exposure, and then Changpeng “CZ” Zhao, the founder of Binance Holdings Ltd., the largest crypto exchange, raised eyebrows by tweeting that Binance would sell its FTT holdings “due to recent revelations.” People worried that this would tank the price of FTT and put pressure on FTX, so they started withdrawing money from FTX. FTX didn’t have the money, and Bankman-Fried started calling around asking for a loan or a bailout. Eventually he called CZ himself, and they announced a non-binding letter of intent for Binance to acquire FTX and make customers whole. Bankman-Fried’s fortune basically vanished, as did his “ emperor aura.” Venture capital investors in FTX — which last raised money at a $32 billion valuation — are probably getting zeroed, the price of FTT collapsed, and now regulators are investigating.
In this description I have drawn on Twitter threads from Jon Wu, Lucas Nuzzi and an anonymous “Wassie Lawyer,” who make arguments along these lines, as well as this Substack post from Byrne Hobart. But the most informed view is probably that of CZ himself, who tweeted this morning:
Two big lessons:
1: Never use a token you created as collateral.
2: Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve.
Binance has never used BNB for collateral, and we have never taken on debt.
“Never use a token you created as collateral” suggests, to me, that FTX accepted its FTT token as collateral, probably from Alameda, probably in exchange for borrowing assets that it owes to customers. And that that went wrong in roughly the way I have outlined.
One other point here is that if this is the story, then it is not a liquidity crisis but a solvency one. That is, the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet. On that note:
Changpeng Zhao moved fast when Sam Bankman-Fried’s FTX.com was on the brink, offering to take it over and stem any further crypto contagion.
Within hours, he was forced to reconsider.
For starters, Binance executives quickly found themselves staring into a financial black hole – a gap between liabilities and assets at FTX that’s probably in the billions, and possibly more than $6 billion, according to a person familiar with the matter.
On top of that, US regulators are circling FTX, investigating whether the firm properly handled customer funds, as well as its relationship with other parts of Bankman-Fried’s crypto empire, Bloomberg News reported Wednesday.
It makes for a tricky decision for Zhao, known in the crypto world as CZ: Follow through with rescuing his onetime top rival and shoulder the financial and regulatory burdens, or let FTX crumble and sort through the potential wreckage? Zhao himself admits there was no “master plan” to take over FTX.
His answer, at least for now, is that the financial hole appears too deep. Binance is unlikely to follow through on its takeover of FTX, according to the person familiar, who wasn’t authorized to publicly discuss the matter.
Seems bad.
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except people like awice don’t view things like most of us do, he is the exact type to go from busto to robusto to busto and not really feel much whereas the rest of us would be pretty devastated
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nope, we wouldn’t have gotten paid a cent from full tilt if it wasn’t for stars and binance just bailed on bailing ftx out
mt.gox people still haven’t seen a dime
in these cases, you’re lucky to get whatever it is you get if anything and it won’t be anytime soon
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Is there a list of celebs that took FTX money? I know larry david and tom brady, was matt damon ftx? Obviously the arena, but even a pretty niche podcast I listen to is advertising ftx as the “safe secure and regulated place to buy and sell digital assets.” lol
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We wouldn’t have gotten out whole, but I don’t think we would have gotten zero. The ultimate bet/absolute accounts got some recovery. It is going to be a mess, but I think a good chance account holders can get a recovery here. Equity a zero thought.
Does it count if Larry David made his whole commercial about how he thinks FTX won’t last?
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I don’t know what regulations Crypto Needs, but I think “A Publicly traded Crypto Exchange can’t hold their version of Internet Scrip as collateral against customer balances” is a pretty good place to start.
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ok so I just watched this advert for the first time. It’s amazing the things david has picked as the greatest inventions of all time. He’s all over the place.
- The Wheel
- Forks
- The Toilet
- Coffee
- The US Constitution
- The Lightbulb
- Going to the Moon
- The iPod
It’s literally a geroge costanza episode of seinfeld
Jerry : You think coffee is one of the top ten inventions of all time?
George : It’s good Jerry.
Jerry : You just said it because it was in front of you didn’t you.
George drinking coffee : Its invigorating.
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Most of the remaining exchanges are jib jabbing about how conservative they are with user funds today 
Lol bitcoin is the “good” Crapto and it’s down 70% from a year ago.
I don’t think it’s a coincidence me and @suzzer99 are the forum olds and we saw this coming a mile away, it checked every single box.
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