6 ms·

The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity. Simil

The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity. Similarly, Sam's fund Alameda was delta-neutral until some time in 2021, which is something that also could have profitably continued in perpetuity, but they got greedy and started making directional bets with leverage.

cellis 4y ago
There’s a Bloomberg article that goes over why this is a bit more nuanced than “gambling with customers funds”. In short, it’s either one or both of poor risk management ( margin traders can’t post collateral and the collateral they had was FTT which went to zero ) and black swan bank runs ( Binance CEO tweets about risky FTT causing bank run causing further drops ). In fact “gambling with customer funds” was by design. Coinbase, to their credit, lost business to the cexes and FTXs for not allowing derivative and defi lending / margin trading. So the customers should have known the fatalistic game they played. If you have a subscription I recommend it. - https://www.bloomberg.com/opinion/articles/2022-11-09/bankman-fried-s-ftx-had-a-death-spiral-before-binance-deal https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...
- wfleming 4y ago
  FWIW you can subscribe to Matt Levine’s column as email newsletter without being a Bloomberg subscriber. (That doesn’t help for reading already-published columns, but of course there are other ways around paywalls.)
  - xwolfi 4y ago
    I bit the bullet and pay for Bloomberg now, it's too good too consistently.
- mumbisChungo 4y ago
  >In fact “gambling with customer funds” was by design. This is not accurate. The ToS for FTX explicitly said that customer funds would not be used for investment purposes. While it didn't explicitly say it wouldn't be used for lending, it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis. It is widely believed now that Alameda went deep underwater during the collapse of the Luna ponzi (this one was quite literally structured like a ponzi) and borrowed a large amount from FTX to bail themselves out of it. In the wake of this, FTX had a shortage of hard assets and a fat bag of FTT that the loan was issued against, which is what exposed them acutely to a bank run and/or price decrease in FTT.
  - uncletammy 4y ago
    > ... it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis. Anyone in crypto who makes this assumption about any other entity in crypto is either brand spanking new or a fool.
    - mumbisChungo 4y ago
      Unfortunately this is not true in this case. Folks who have been in the industry for 10 years, many very publicly cynical, had assets on FTX. It was viewed by many as the safest CEX in the industry. I'm a bit more paranoid, so I maintain self-custody 100% of the time unless I'm using an on/off-ramp, but some very bright, very oldschool folks got caught up in this one.
  - colinmhayes 4y ago
    Right so they didn’t invest customer assets, they just loaned them to themselves in exchange for their own token so that they could invest the customer assets.
- brobinson 4y ago
  https://archive.ph/CxJqM https://archive.ph/CxJqM
- potatototoo99 4y ago
  The issue wasn't the bank run. FTX could just have halted withdrawals, CEX do it all the time. The issue was FTT collaterized loans or equivalent, because they gambled too hard. And I doubt their users were aware of the risks, sBF himself guaranteed on Twitter the day before.
- netheril96 4y ago
  Bank runs are wrong for exchanges. They never should have fractional reserves. And derivative trading shouldn’t be based on lending out customer funds. The exchange should lend out their own funds. They charge a lot of interest for the leverage, and they don’t even take the risk on their own money?
- nr2x 4y ago
  Bloomberg is currently the only news source I feel makes me smarter after I read an article.
jti107 4y ago
reminds me of LTCM...they were making bank until the Asian bank crisis and Russia defaulting on their debt https://www.dailymotion.com/video/x225si7 https://www.dailymotion.com/video/x225si7
- oldgradstudent 4y ago
  Very different. LTCM was making massive, very risky bets while pretending they were safe. They were making insanely leveraged bets on real assets. FTX seems to me to much closer to Madoff. They were printing their own Monopoly money and pretending it was worth billions.
  - mumbisChungo 4y ago
    The core of the issue here was not ponzinomics, it was the exchange gambling directly with user funds, by way of unsecured loans to a hedge fund controlled by the founders. Fraud? Yes. But users weren’t buying into a ponzi, they were using a centralized exchange product with the understanding that reserves were whole, when in reality they were secretly fractional reserves.
    - lizknope 4y ago
      SBF literally describes a magic ponzi box https://www.youtube.com/watch?v=C6nAxiym9oc https://www.youtube.com/watch?v=C6nAxiym9oc
  - jeffreyrogers 4y ago
    LTCM actually was doing a lot of the risk management people later said they should do. Their problem was the trades they were doing were more crowded than the realized and they couldn't unwind them cheaply because everyone else was doing the same thing. Plus once people realized they were struggling other market participants started betting against them. There have been other similar situations since then. In August 2007 most of the big quant funds lost double digit percentages in a few days when someone had to unwind a portfolio and statarb strategies stopped working.
nullc 4y ago
Why do you think a single thing they told the public was ever truthful? It seems naive to me.
- mumbisChungo 4y ago
  I’m not sure what you mean by this exactly. Many of the things they said to the public are not true, but these currencies use permanent, public ledgers, so you can see where the money goes if you look carefully.
  - TedDoesntTalk 4y ago
    Does the ledger capture loans of user funds held by FTX?
    - mumbisChungo 4y ago
      Yes
      - JustLurking2022 4y ago
        Not if the asset being loaned is cash
  - nullc 4y ago
    How is that particularly relevant? Data isn't knowledge. Just because some assets have public records doesn't really tell you anything about liabilities or underlying ownership. Exchanges could practice provable solvency ( https://eprint.iacr.org/2015/1008.pdf https://eprint.iacr.org/2015/1008.pdf ), but they aggressively do not-- in part because they don't want to bring customers attention to the potential issue (and they rightfully reason that once customers are concerned no amount of technical solution will likely satisfy them). But FTX wasn't really an exchange-- it was a scamcoin casino primarily trading in highly leveraged proxy assets ("perpetuals") as a bucketshop.
    - 4y ago
PaulWaldman 4y ago
>The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity. Where were their profits derived? Was it from taking their slice of every transaction? Or selling their freshly minted coins? If it was the latter, that only works for so long, just ask the Fed.
- saberdancer 4y ago
  What always surprises me why does anyone feel the need to steal from users when you are literally "the house" - you are taking a fee on every transaction. Just like in poker - if you are the house, you don't need to take risk by playing at the tables. FTX was probably hugely profitable before they started stealing.
- oldgradstudent 4y ago
  > Where were their profits derived? Is there any reason to believe there were any profits ever?
  - mumbisChungo 4y ago
    Of course. They were one of the highest volume exchanges, taking a % of every transaction. Unfortunately, they got greedy and started lending money (to themselves in Alameda, where it was gambled away)
    - xwolfi 4y ago
      They started AS Alameda and THEN made an exchange to facilitate their trades. They did not exist for any other purpose than doing the good old Tether + Bitfinex = iFinex.
- mumbisChungo 4y ago
  Trading fees on billions of dollars of volume.
  - 4y ago
r00fus 4y ago
If something doesn't make sense after a detailed review - my instinct is that there is hidden knowledge that I don't have.
- bowsamic 4y ago
  That instinct will mislead you. It denies stupidity and irrational choices and leads to conspiracy theories
  - oldgradstudent 4y ago
    Usually it's just simply old fashioned fraud.
oldgradstudent 4y ago
> FTX was a money printing machine Turns out, they were a Monopoly money printing machine.
- colinmhayes 4y ago
  No, FTX was making bank in fees. They just got greedy and loaned customer funds the SBF’s hedge fund to gamble with. Hedge fund went bust and now the loans default and the collateral which was just funny money to begin with is worthless.
  - grey-area 4y ago
    If you believe FTX at all. These companies are riddled with fraud. Nothing they say or have said can be trusted (including reported earnings), and Tether and Binance will be next to collapse, at which point the ecosystem around Bitcoin will implode.

cellis 4y ago

There’s a Bloomberg article that goes over why this is a bit more nuanced than “gambling with customers funds”. In short, it’s either one or both of poor risk management ( margin traders can’t post collateral and the collateral they had was FTT which went to zero ) and black swan bank runs ( Binance CEO tweets about risky FTT causing bank run causing further drops ). In fact “gambling with customer funds” was by design. Coinbase, to their credit, lost business to the cexes and FTXs for not allowing derivative and defi lending / margin trading. So the customers should have known the fatalistic game they played. If you have a subscription I recommend it. - https://www.bloomberg.com/opinion/articles/2022-11-09/bankman-fried-s-ftx-had-a-death-spiral-before-binance-deal https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...

wfleming 4y ago
FWIW you can subscribe to Matt Levine’s column as email newsletter without being a Bloomberg subscriber. (That doesn’t help for reading already-published columns, but of course there are other ways around paywalls.)
- xwolfi 4y ago
  I bit the bullet and pay for Bloomberg now, it's too good too consistently.
mumbisChungo 4y ago
>In fact “gambling with customer funds” was by design. This is not accurate. The ToS for FTX explicitly said that customer funds would not be used for investment purposes. While it didn't explicitly say it wouldn't be used for lending, it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis. It is widely believed now that Alameda went deep underwater during the collapse of the Luna ponzi (this one was quite literally structured like a ponzi) and borrowed a large amount from FTX to bail themselves out of it. In the wake of this, FTX had a shortage of hard assets and a fat bag of FTT that the loan was issued against, which is what exposed them acutely to a bank run and/or price decrease in FTT.
- uncletammy 4y ago
  > ... it was a broad assumption in the industry that the exchange was solvent and could back user assets on a 1:1 basis. Anyone in crypto who makes this assumption about any other entity in crypto is either brand spanking new or a fool.
  - mumbisChungo 4y ago
    Unfortunately this is not true in this case. Folks who have been in the industry for 10 years, many very publicly cynical, had assets on FTX. It was viewed by many as the safest CEX in the industry. I'm a bit more paranoid, so I maintain self-custody 100% of the time unless I'm using an on/off-ramp, but some very bright, very oldschool folks got caught up in this one.
- colinmhayes 4y ago
  Right so they didn’t invest customer assets, they just loaned them to themselves in exchange for their own token so that they could invest the customer assets.
brobinson 4y ago
https://archive.ph/CxJqM https://archive.ph/CxJqM
potatototoo99 4y ago
The issue wasn't the bank run. FTX could just have halted withdrawals, CEX do it all the time. The issue was FTT collaterized loans or equivalent, because they gambled too hard. And I doubt their users were aware of the risks, sBF himself guaranteed on Twitter the day before.
netheril96 4y ago
Bank runs are wrong for exchanges. They never should have fractional reserves. And derivative trading shouldn’t be based on lending out customer funds. The exchange should lend out their own funds. They charge a lot of interest for the leverage, and they don’t even take the risk on their own money?
nr2x 4y ago
Bloomberg is currently the only news source I feel makes me smarter after I read an article.

jti107 4y ago

reminds me of LTCM...they were making bank until the Asian bank crisis and Russia defaulting on their debt https://www.dailymotion.com/video/x225si7 https://www.dailymotion.com/video/x225si7

oldgradstudent 4y ago
Very different. LTCM was making massive, very risky bets while pretending they were safe. They were making insanely leveraged bets on real assets. FTX seems to me to much closer to Madoff. They were printing their own Monopoly money and pretending it was worth billions.
- mumbisChungo 4y ago
  The core of the issue here was not ponzinomics, it was the exchange gambling directly with user funds, by way of unsecured loans to a hedge fund controlled by the founders. Fraud? Yes. But users weren’t buying into a ponzi, they were using a centralized exchange product with the understanding that reserves were whole, when in reality they were secretly fractional reserves.
  - lizknope 4y ago
    SBF literally describes a magic ponzi box https://www.youtube.com/watch?v=C6nAxiym9oc https://www.youtube.com/watch?v=C6nAxiym9oc
- jeffreyrogers 4y ago
  LTCM actually was doing a lot of the risk management people later said they should do. Their problem was the trades they were doing were more crowded than the realized and they couldn't unwind them cheaply because everyone else was doing the same thing. Plus once people realized they were struggling other market participants started betting against them. There have been other similar situations since then. In August 2007 most of the big quant funds lost double digit percentages in a few days when someone had to unwind a portfolio and statarb strategies stopped working.

nullc 4y ago

Why do you think a single thing they told the public was ever truthful? It seems naive to me.

mumbisChungo 4y ago
I’m not sure what you mean by this exactly. Many of the things they said to the public are not true, but these currencies use permanent, public ledgers, so you can see where the money goes if you look carefully.
- TedDoesntTalk 4y ago
  Does the ledger capture loans of user funds held by FTX?
  - mumbisChungo 4y ago
    Yes
    - JustLurking2022 4y ago
      Not if the asset being loaned is cash
- nullc 4y ago
  How is that particularly relevant? Data isn't knowledge. Just because some assets have public records doesn't really tell you anything about liabilities or underlying ownership. Exchanges could practice provable solvency ( https://eprint.iacr.org/2015/1008.pdf https://eprint.iacr.org/2015/1008.pdf ), but they aggressively do not-- in part because they don't want to bring customers attention to the potential issue (and they rightfully reason that once customers are concerned no amount of technical solution will likely satisfy them). But FTX wasn't really an exchange-- it was a scamcoin casino primarily trading in highly leveraged proxy assets ("perpetuals") as a bucketshop.
  - 4y ago

PaulWaldman 4y ago

>The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity. Where were their profits derived? Was it from taking their slice of every transaction? Or selling their freshly minted coins? If it was the latter, that only works for so long, just ask the Fed.

saberdancer 4y ago
What always surprises me why does anyone feel the need to steal from users when you are literally "the house" - you are taking a fee on every transaction. Just like in poker - if you are the house, you don't need to take risk by playing at the tables. FTX was probably hugely profitable before they started stealing.
oldgradstudent 4y ago
> Where were their profits derived? Is there any reason to believe there were any profits ever?
- mumbisChungo 4y ago
  Of course. They were one of the highest volume exchanges, taking a % of every transaction. Unfortunately, they got greedy and started lending money (to themselves in Alameda, where it was gambled away)
  - xwolfi 4y ago
    They started AS Alameda and THEN made an exchange to facilitate their trades. They did not exist for any other purpose than doing the good old Tether + Bitfinex = iFinex.
mumbisChungo 4y ago
Trading fees on billions of dollars of volume.
- 4y ago

r00fus 4y ago

If something doesn't make sense after a detailed review - my instinct is that there is hidden knowledge that I don't have.

bowsamic 4y ago
That instinct will mislead you. It denies stupidity and irrational choices and leads to conspiracy theories
- oldgradstudent 4y ago
  Usually it's just simply old fashioned fraud.

oldgradstudent 4y ago

> FTX was a money printing machine Turns out, they were a Monopoly money printing machine.

colinmhayes 4y ago
No, FTX was making bank in fees. They just got greedy and loaned customer funds the SBF’s hedge fund to gamble with. Hedge fund went bust and now the loans default and the collateral which was just funny money to begin with is worthless.
- grey-area 4y ago
  If you believe FTX at all. These companies are riddled with fraud. Nothing they say or have said can be trusted (including reported earnings), and Tether and Binance will be next to collapse, at which point the ecosystem around Bitcoin will implode.