Sunday, November 20, 2022

There always seemed to be something a little too “cryptic” about crypto-currency

 

In the office building I work in, every day for years I’ve walked past a stack of magazines where this one in particular has been prominently displayed:

 


The individual on the cover is Sam Bankman-Fried, at the time 29-years-old and “worth” $25 billion as the founder of the trading company Alameda Research and the crypto-currency exchange FTX. The reason this magazine issue was prominently displayed was perhaps to demonstrate that anyone with a great idea can be an instant multi-billionaire. Of course we’ve seen this before, with someone named Elizabeth Holmes—and like Holmes, Bankman-Fried was mostly smoke-and-mirrors. He and FTX were based in the Bahamas, and there seems to be a reason for that. Bankman-Fried, his crew of “wiz kids,” Alameda and FTX has gone within a matter of months from the “darling” of the business world to bankruptcy and he himself and his cohort Caroline Ellison...

 


...who many are describing as the real "architect" of the collapse because she had a free hand in all of what transpired to cause it, are apparent “fugitives” from the law—or at least are making it difficult for people to find them. This video may (or may not) "illuminate" what exactly transpired here:

https://www.youtube.com/watch?v=20BEJouWBgY

Financial wheeling and dealing leading to ruin isn’t unusual; the Great Depression was caused by those who knew that the reckoning of the financial fraud behind the stock market bubble was coming, but tried to keep the bubble from bursting by claiming that everything was “great”  so that people would continue to believe that this was so. Those who knew they were about to lose their shirts because of the fraud sold their stocks before the bubble burst, but with people suddenly concerned with these unexpected actions, this led to a massive run to dump stocks.

The problem was that stock holders—particularly ordinary people who bet everything they had in stocks—couldn’t find anyone willing to buy stock, and prices plummeted to below the prices that people paid for the stock, especially those who bought stock on credit, meaning both themselves and the entities that gave them the loans lost their “shirts.”

The FTX disaster and the crypto-currency market in general was also caused by financial mismanagement, but perhaps a little less from incompetence and people living in a fantasy world than by simple greed by people too “smart” of their own good. But what is “crypto-currency” anyways? I mean it even sounds somehow “illegal” or “cryptic”—something people use if they are trying to hide something, and keep it “confusing” so people don’t look too deeply into it; only “smart” people are supposed to “understand” it.

Indeed, crypto-currency has been used to conceal illegal payments, money laundering, funding terrorist groups, and hide income. Indeed, the whole “point” of it is to be “untraceable” by third-parties, like say, law enforcement, government watchdogs or Russian hackers. Basically it sells itself as a method to transfer funds or payments without a “middleman,” such as a bank—thus it is not technically regulated or subject to fees. Of course this can easily lead to fraud and mismanagement.

One may ask if crypto-currency is actually “real” money, such any typical transfer of funds from a debit card which is based on actual money someone has in a bank account rather than simply credit. Of course whatever money someone has in an account is just a number on a spread sheet unless it is actually withdrawn from a bank in the form of hard cash, but at least the bank is required to “guarantee” it. Crypto-currency like Bitcoin uses a term like “coin” not because it is actually a “coin” or physical currency of any sort, but just something that the user can “imagine” it being “like,” such as a “token” like something you put in a slot machine at a casino.

Crypto-currency may initially be backed by actual bank transfers—or merely a shady “investment” scheme where no real money is ever exchanged, but a “loan” that is paid back in the expectation of massive increases in the “value” of a “token.” While it may have the “functionality” of actual money, what it actually “buys” depends on whether a retailer actually accepts crypto-debit cards as legitimate payment. In the meantime, crypto-currency is “played” like typical stocks, except that its value is predicated on perceived demand because of its supposed limited availability, and thus its “value” rises as demand increases.  According to Investopedia

There are six key attributes to a useful currency: scarcity, divisibility, acceptability, portability, durability, and resistance to counterfeiting (uniformity). These qualities allow a currency to find widespread use in an economy. They also limit monetary inflation and ensure that the currencies are secure and safe to use.

But those dealing in crypto-currency have not been playing by these rules in practice, at least not of late; all this wishful thinking by the “easy money” tech “wizards,” like Holmes—sentenced to 11 years in prison, delayed until she gives birth to her second child that she had hoped would prevent this eventuality—has revealed a much darker reality. 

Earlier this year the crypto-currency business took a major hit on its market value because what it was doing was contrary to the theory behind it, which was to keep its value “up” by keeping its availability low. According to the Harvard Gazette, “meltdowns” involving such high-profile crypto companies like Bitcoin saw a $2 trillion fall in market value, to less than that one-third of their value in six months. In an interview with a business administration professor named Scott Kominers, the Gazette learned that there was too much volatility in the crypto market due to “uncertainty” about which crypto technology was “best” and safest for mainstream business to deal with. Companies don’t have the money to waste at this time to find out.

All this was before the FTX fiasco, and it wasn’t even mentioned in the interview. Kominers did say, however, that there was a need for increased regulation to protect users of the “product,” and now we know why. Before, one of the ideas behind crypto was that people assumed that their “money” was “safe” and not subject to use for investments without their prior approval. But now we discover that since that piece, things much worse were lurking behind the scenes of the allegedly “stable” FTX, only recently valued as high as $32 billion—and its complete collapse happened in literally weeks, if not days.

According to CNBC, venture capitalist Alex Pack encountered Bankman-Fried who he described as “charismatic," and was at the time searching for start-up funds for Alameda Research. Pack eventually decided Bankman-Fried was too much of a risk-taker, since the “books” showed an unexplained loss of $10 million, which suggested that bad investments were being made. and declined to give him funds.

According to the New York Times

The main way that Alameda made money was straightforward: It bought Bitcoin and other crypto-currencies in one part of the world and sold them in another, pocketing the difference. Alameda’s methods borrowed many aspects from traditional high finance. It was a quantitative trading firm, similar to Wall Street hedge funds that use mathematical models and data to inform decisions. It used “leverage” — or borrowed money — to fuel its trades and make bigger returns. And its Bitcoin trade was a so-called arbitrage trade, also popular on Wall Street. But while Wall Street firms operate within guardrails that limit risk-taking and require regular financial disclosures, Alameda had no regulatory oversight. But with the price of Bitcoin and other cryptocurrencies soaring — and expected to keep going up — Alameda had no trouble paying back its loans in either dollars or crypto. That’s why, in the presentation to investors, Alameda was able to say it could offer lenders “high returns with no risk” and “no downside.”

But because of the lack of oversight, “serious” big-money investors wanted nothing to do with crypto-currency. Some may have recalled Ruja Ignatova and her OneCoin crypto-ponzi fraud; Ignatova has been on several countries most wanted list since she disappeared five years ago with billions of dollars of stolen money. 

Bankman-Fried decide to create his own “exchange”—FTX—with his own “coin” or “token,” which he called FTT, thus funding Alameda’s activities “in house.” Since he was such a convincing pitchman, he was able to get “ordinary” people to invest “seed” money to get everything rolling, since their “investment” was like investing in stocks, and the value of crypto-currency was literally doubling in value every time you looked, or so this was the “pitch.”

Hardly anyone understood how this actually “worked,” but they bought into the hype. To keep things “simple,” Alameda’s bad “legitimate” investments (including in venture investments that the “kids” running the show hardly understood what they were doing), and over-relied on trading with FTX, whose actual worth was much less than advertised, and when crypto-currency imploded, it took Alameda and all its “legitimate” invested money with it.

What people investing in Alameda didn’t know was that their money allegedly going to Alameda was in fact going to keep FTX afloat, which was hemorrhaging money despite being worth multi-billions on paper—except that there were some things missing “on paper.” Even worse, Alameda was dependent on FTX’s fake “money” to keep its own books looking “solvent.” It seems that Bankman-Fried and Ellison were a little too “smart” for their own good, believing they could get away with things that they hoped people’s whose money they were playing with wouldn’t notice.

Bankman-Fried sold himself as an “altruist” trying to help people navigate the vague world of crypto-currency, although there was a extremely healthy profit in it for him. He had some help, of course. Ellison, a bespectacled kid with no experience rose to become the CEO of Alameda, and served not only as a “face” and propagandist that people were eager to give their money to, but she also had a free hand in the wheeling and dealing with other people’s “money.” Alameda was essentially said to run by a “gang of kids” who were “dating each other” living and working in a vacation spa in the Bahamas. They were just having “fun” playing around without any clue to or responsibility for what they were doing.

Alameda claimed to match buyers and sellers, and promised investors a “fixed” rate of profit with no chance of taking a loss. Many people found this “promise” to be a little hard to believe, but they certainly had many high-profile takers, like NFL quarterback Tom Brady, former NBA star Shaquille O’Neal and comedian Larry David (all these and more are currently the subject of a lawsuit by an investor who feels he was “misled” by them serving as spokespersons).

To reiterate, the money invested in Alameda was being poured into FTX in money losing investments, and FTX was simply “printing” valueless “tokens” to replace what was lost on Alameda’s books. It was essentially just Monopoly “money” that is “real” in the “game” but of course you can’t use it buy anything “real.” Thus of the nearly $15 billion in “assets” that Alameda had this past summer, most of it was nothing more than worthless “tokens.”

According to Investopedia, it took only 10 days for FTX to collapse this month, after the crypto-news website CoinDesk confirmed that Alameda held most of its apparent “value” in FTT. But as these tokens were essentially worthless, it was not unlike the Fed printing out money--except that there was no Treasury Department to "guarantee" this fake “money.” Once this information came out, FTX admitted some issues but still claimed to be solvent.

Binance was going to “bail out” FTX, but this was probably just a ploy by its CEO to expose his biggest rival. Binance had already liquidated its equity from FTX, which started a chain reaction of others bailing out. Because there was nothing of real value in FTX because of money-losing trading using mostly loaned money, and this in turn exposed Alameda’s backing by fraudulent assets. FTX and Alameda filed for bankruptcy, but there was nearly a half-million dollars in “unauthorized transactions” by hackers; what was left was ordered into the digital “wallet” of the Bahamas’ securities regulator.

The bottom line here is that this disaster added on to the collapse in value over the past year of the crypto-currency business in general, and means that the value of this essentially “fake” currency was dependent on blind faith that it actually has “value.” The problem is that crypto-currency sold itself on the promise that your “money” was “safer” than if you put in a bank or stocks, and hackers couldn’t access your bank or credit card accounts. This turned out not to be true, because the people allegedly overseeing the operations—at least in the case of Alameda Research and FTX—were playing with your “money” like children with “play money” who didn’t know that for their customers this wasn’t a “game,” but was “real.”

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