(Usage herein unless otherwise noted: bitcoin = bitcoin; crypto = everything else)
A lot of people think crypto is worth something.
A lot of people think bitcoin is worth something.
Most people in each community think fiat currency has major problems.
And they all believe in the cross fungibility of cryptocurrency and fiat.
Which is why they are missing a huge point about FTX.
The broad crypto community can’t even imagine the perspective of someone who thinks all of crypto (and BTC) is a bunch of bullshit.
And it is from that perspective where our story is told. First, a little background.
For lots of reasons, the concept of cryptocurrency always pissed off the old white collar on a blue striped shirt finance guys.
Those guys cut their teeth in the go-go 80s and dot-com 90s and now zoomer & millennial crypto “traders” want to tell them how markets work.
The old guys know what a mania looks like. They know what people investing in bullshit looks like. They traded pets.com, for God’s sake.
So when the rapscallions of crypto refused to come get their entry analyst jobs and instead wanted to build an alternative financial system, the old guard took notice.
The wrong people started getting rich. And even if most of their “wealth” was still locked in the land of magic beans (crypto tokens), they were still pulling out enough dollars to make a splash.
“They are buying all the Lambos, Mortimer! This shit is getting out of hand. Time to kill the baby.”
Market Caps and Traps
Market capitalization isn’t real. It’s a notional value representing the maximum value of all the existing units of an instrument if you could sell them at the current bid. But you never can. When the entirety of an issue goes up for sale, there is, for a single moment, not a single buyer. And then the price drops by a lot.
This is all glaringly obvious but still bears repeating. Because we live in a world where we’re constantly told market caps equal net worth. A world where idiots like Elizabeth Warren want to tax “big wampum number” every time someone multiplies a share count times a price.
In the 1990s people thought Bill Gates was worth $35B. But he couldn’t sell $35B of MSFT back then even if he wanted too. Gates is rich, Elon is rich, Bezos is rich, but not as rich as dumb reporters say they are.
They can only fully convert their wealth into dollars when they retire, when they are allowed to sell all their converted founder’s shares without restriction.
The View from Above
The old guys look at crypto as a closed system. Just a black box with a bunch of token ledgers that people are buying with dollars. And those dollars are ultimately debited and credited between accounts in the traditional finance world.
If all the tokens inside the black box disappeared, the same amount of dollars would exist in the real world. No net wealth has been created.
In accounting terms, you can’t actually do a debit to cash and a credit to crypto.
No matter how many passionate speeches are given about DeFi, the systems are independent. Dollars are dollars and crypto is crypto.
All of the value inside the crypto system is imaginary and all the money that has been traded in crypto markets are just dollar credits and debits inside the old guys’ financial system.
There is no inherent value in crypto, only the net value on exit.
You don’t have to agree with this take, just acknowledge that some might see it this way.
And if you control the dollar/fiat system, you face a choice whether to allow a blending of the two systems or to keep crypto in a box and kill it by blocking the exits.
Most importantly, if you can set up a toll booth and milk the muppets of their real world dollars, you do it. The old guys know how this game is played. It doesn’t matter if the muppets are buying FTT or shares of eToys.com.
And so, decisions were made.
Liquidity Inside & Out
You don’t get liquidity for nothing in crypto. You can’t just print a billion tokens, sell one for a dollar and call yourself a billionaire. That only works for Theranos. You need a backer.
This has usually meant working with some huge sketchy bitcoin whales to liquify the trade in your token and create the illusion of demand.
Especially in the first rally of 2017, liquidity in crypto was mostly endogenous. That is to say it came from bitcoin (BTC). The exogenous (dollar) liquidity came later. And it is that dollar liquidity that drove a lot of the second boom of 2020-21.
But the relationship between endogenous (mostly BTC) and exogenous (your 19 year old nephew buying DOGE) is incredibly weighted towards the “value” already inside the system.
It’s a large pile of useless tokens leveraged by people with unlimited borrow. And whatever new money is coming in to bid them up even more.
Crypto people think real wealth creation has happened.
Trad finance guys think the crypto people bid up a bunch of magic beans inside a closed system and when they run for the exits, finance needs to slam the door in their face.
There is no spoon. When a market goes bidless, there is no market.
And at a time when dollar liquidity is being drained worldwide, if you think crypto is going to moon, you may be a tad disappointed.
All Ponzi schemes die of the same cause: a liquidity shortage.
But they bilk a lot of people and collect a lot of cash before that happens. And the people who run Ponzis are not looking to share the top of the pyramid.
But what if you could offer to increase the vig and extend the lifecycle of a Ponzi scheme? What if you systematized that?
Inside crypto, there has been no shortage of projects in urgent need of liquidity. Crypto liquidity needs can be satisfied by worthless tokens leveraged to infinity.
In the real world, the powers that be have decided the contagion effect from crypto is too much to bear.
All the exogenous liquidity is preserved in the real financial world. It’s a zero sum game. The crypto table can be knocked over with very little long term risk to the traditional system, as long as that happens before any real fusion occurs.
SBF could even be a patsy, while still possibly being a criminal fraudster in this story. A patsy who believed in crypto being controlled by those who believe in fiat.
After considering all of the above, imagine those powerful and connected handlers and how they would achieve their goals.
How would that look?
The Alt-take on FTX
There have been countless post-mortems published on FTX. A lot of them are very, very good.
All come from the perspective that crypto has inherent value and fungibility. Which leads to a common thesis that FTX found itself spiraling out of control and then did a lot of trades and acquisitions to postpone the inevitable, leading to a cataclysm. This view also prevents another way of looking at the situation.
What if FTX did not find itself in this situation by unfortunate circumstance?
What if it was built for this?
What if FTX was created to eat Ponzi schemes in the wild and deplete them of any actual cash they had? Because the whole project was actually architected by those who don’t really believe in crypto?
It just had to survive long enough to eat all of the major Ponzis in the space. Extracting all the cash and paving the way for regulatory pushback.
It would go something like this:
- Create a crypto exchange
- Become a market maker and mover
- Pretend to be US compliant by having a placeholder US presence (FTX.us)
- Maybe make a stablecoin (was in progress)
- Definitely make a market traded token (FTT)
- Liquify the token with dollars (USDT)
- Target Ponzicoin projects with proven real world cash reserves
- Advance them liquidity via FTT
- Securitize the loans with their cash
- Extend their runways, allowing them to keep aggregating cash
- Wait for their collapse
- Take their cash, book a loss
Do this until you have wiped out all the major players and have set the stage for a changing of the guard.
This money eating machine was always destined to fail. But so was the market it played in. Perhaps the creators of FTX decided to roll up all the Ponzis in a giant mega-Ponzi and extract all the cash for as long as possible.
It might have lasted longer but for the recent bitcoin price drop which injected a black swan into the timeline and likely blew out a lot of positions FTX was counting on to remain solvent.
Where the money was intended to go is open to speculation.
How this started is a more interesting question. How much dollar liquidity flowed into FTX via USDT to create credibility for the FTT token is a much more interesting question.
This alternate angle is where we invite others to gaze from and see if it helps elucidate the situation any further as more and more information continues to come out.
For more detail, join Tom and I as we discuss this on the podcast:
Join my Patreon if you like eating Ponzis
Your analysis is beyond brilliant. It does lack one feature which explains why the rug was pulled on the 8th. First,the Davos monsters did not want to affect the election but most importantly they feared there was a fear of a rapid shift to BTC as a hedge against both inflation and the chaos they are creating. Crypto had to be destroyed and now was the time.Too many people are beginning to look at BTC as the last resort rather than gold which they fully control. IMHO I’m waiting for 4000 and begin buying.
I think you are definitely onto something with this. Yes, there is a bit of “Abandon All Hope Ye Who Enter Here” because we will close off all your escape routes. I’m now with you that BTC is likely crashing into the single digits at which point everyone will be backing up the truck.
There are too many moving parts for Schwab et.al. to control…and as I sit here in the Free State of Florida I can see a world where we have them by the short and curlies. Dexter’s work on this one is, as you say, brilliant.
I suspect more chicanery was afoot but that the recent downturn in BTC’s price created a margin call storm and the great undoing of FTX commenced as a result.
My take is their endurance collapsed after election day when there was no longer any reason to perpetuate the scam, whereas Tom thinks they were rubbing our noses in it. The truth is probably a bit of both.
This was a brilliant column.
The whole world is set up this way, by the way, with two diametrically opposed but equally valid perspectives. In most cases the perspectives rarely collide, so we never question them, or have need to.
“Is the US-Canadian Border real?” What a ridiculous question. Try to cross it without the correct documentation and you will discover how real it is. However, if you consult a geologist, they will not be able to show you the border on a map.
The two realities only collide when non-normal circumstances arise, say when you a have a critically ill friend and the hospital you need to get them to is on the other side of the closed border. If you cross (the geologist’s POV) you save your friend and are arrested, if you stay put (the lawyer’s POV) and wait until the border opens, your friend dies and you stay free.
When you ponder that, you will discover that so many other things exist like that. Do you ever question your property line, whether you live in the state of Florida, or your family name? Of course not!
Then, on some rare occasion, something occurs which gives you insight into “the construct”.
I just love how this column does that: “old white collar on a blue striped shirt finance guys”. For those who will take the time, you have really taught something profound.
Bravo! I don’t have the superlatives to go further.
Thank you, glad you enjoyed it. It’s definitely intended as an alternate view of the same subject as you deftly point out.
All of the analyses of the FTX debacle I’ve seen seem to take as a given that the FTT token had real value and then begin their dissection of the great collapse from that point.
I’m just asking how did we get here? I think the origin story is more interesting than the collapse. And I haven’t even convinced myself of what I lay out in the article. However, I have not found anything among all the great detective work that precludes what I lay out being the real motivation.
More information will come out and I’m sure Tom and I will revisit this pretty soon.
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